INVESTMENT AND

COMPETITION LAW
UNIT 2 - Banks and Securities
 Role of Banks In India

• Bank is a financial institution that performs several

functions like accepting deposits, lending loans thus
helps in agriculture and rural development etc.
• Bank plays an important role in the economic
development of the country. Without a sound and
effective banking system, no country can have a
healthy economy.
• It is necessary to encourage people to deposit their
surplus funds with the banks. These funds are used -for
providing loans to the industries thereby making
productive investments.
• The most important role of a bank is to connect
those who have capital with those who need capital.
• India is not only the world’s largest independent
democracy, but also an emerging economic giant.
• For the past three decades, India’s banking system
has several outstanding achievements.
• This is one of the reasons of India’s growth process.
According to joint report prepared by KPMG-
Confederation of Indian Industry (CII), Indian
banking sector is poised to become fifth largest by
2020.
• After post economic liberalization and globalization,
there has been a significant impact on the banking
industry.
• The concept of Banking in India dates back to the first
half of 18th century. The first bank that was established
in the country was The General Bank of India founded
in 1786.
• The oldest bank in existence in India is the State Bank
of India, a government-owned bank in 1806. SBI is the
largest commercial bank in the country. After the
independence, Reserve Bank of India was nationalized
in 1935.
• The Indian banking system consists of 26 public
sector banks, 25 private sector banks, 43 foreign
banks, 56 regional rural banks, 1,589 urban
cooperative banks and 93,550 rural cooperative
banks, in addition to cooperative credit institutions.
• Public-sector banks control nearly 80 percent of the
market, thereby leaving comparatively much
smaller shares for its private peers.
• Banks are also encouraging their customers to
manage their finances using mobile phones.
• Today, banks have diversified their activities and are
getting into new schemes and services that include
opportunities in credit cards, consumer finance, life
and general insurance, investment banking, mutual
funds, pension fund regulation services, etc.
• Today, the banking sector is one of the biggest
service sectors in India. The focus of banks has
shifted from customer acquisition to customer
retention by providing various products like internet
banking, ATM services, telebanking and electronic
payment etc.
• The facility of internet banking enables a consumer
to access and operate his bank account without
actually visiting the bank premises. The facility of
ATMs and credit/debit cards has also helps a lot.
• Banks can contribute to a country’s economic
development in the following ways:
• 1. Removing the deficiency of capital formation:
In any economy, economic development is not possible
unless there is an adequate amount of capital formation. The
serious capital deficiency in developing Countries is
removed by banks.
A sound banking system mobilizes small savings of the
community and makes them available for investment in
productive enterprises.
Banks mobilize deposits by offering attractive rates of
interest and thus convert savings into active capital.
Otherwise that amount would have remained idle.
Banks distribute these savings through loans among
productive enterprises which are helpful in nation building.
It facilitates the optimum utilization of the financial
resources of the community.
• 2. Helps in generating employment opportunity:
Banks helps in providing financial resources to
industries and that helps in automatically generate
employment opportunity.
Especially employment generated by banking sector
every year runs in millions. Equally revenue generation
through tax and dividend collection by the government
invested every year.
While revenue and employment generation are two very
important contributions, successfully maintaining
healthy credit line to industrial sector as well as to
overall economy is another important contribution of
financial sector.
• 3. Promote saving Habits of the people:
Bank attracts depositors by introducing attractive
deposit schemes and providing higher rates of
interest. Banks providing different kinds of deposit
schemes to its customers.
It enables to create saving habits among people. Bank
open different accounts to attract customer. These
accounts are opened as per the requirements of
customers such as current account, fixed deposit
account, saving account and recurring account etc.
• 4. Financial assistance to Consumer Activities :
People in underdeveloped countries being poor and
having low incomes do not have sufficient financial
resources to buy durable consumer goods.
The commercial banks advance loans to consumers
for the purchase of such items as houses, furniture,
refrigerators, etc. In this way, they also help in raising
the standard of living of the people in developing
countries by providing loans for consumption
activities.
• 5. Helps in implementing Monetary Policy:
The commercial banks help the economic development
of a country by implementing the monetary policy of the
RBI.
RBI depends upon the commercial banks for the success
of its policy of monetary management in keeping with
requirements of a developing economy.
Thus the commercial banks contribute much to the
growth of a developing economy by granting loans to
agriculture, trade and industry, by helping in capital
formation and by following the monetary policy of the
country.
• 6. Foreign Currency Loans:
Foreign currency loans are meant for setting up of
new industrial projects. Banks also helps in providing
loans for expansion, diversification, modernization or
renovation of existing units. Banks also helps in
financing import of equipment from abroad and/or
technical knowhow.
• 7. Financial assistance to agriculture sector:
Agriculture is the backbone of economy of any
country like India. The commercial banks help the
large agricultural sector in developing countries.
They provide loans to traders in agricultural
commodities. They open a number of branches in
rural areas to provide agricultural credit.
They provide finance directly to agriculturists for the
marketing of their produce, for the modernisation and
mechanisation of their farms, for providing irrigation
facilities, for developing land, etc.
• The share of commercial banks in total institutional
credit to agriculture is almost 48 percent followed by
co-operative banks with a share of 46 percent and
RRBs about 6 percent. .
• Most of the credit related schemes of the government
to uplift the poorer and the under-privileged sections
have been implemented through the banking sector.
• They also provide financial resources for animal
husbandry, dairy farming, sheep breeding, poultry
farming, and horticulture.
• The small and marginal farmers and landless
agricultural workers, artisans and petty shopkeepers
in rural areas are provided financial assistance
through the regional rural banks in India.
• There are various studies which show that in India
40% farmers are committing suicide because of not
able to fulfill the loan amount of banks. Commercial
banks are providing credit to the poor farmers but
this is not free from the other problems.
 Role of Banks to Issue Securities

• According to Banking Regulation Act 1959, Bank is

one which ‘transacts the business of banking
meaning thereby the accepting for the purpose of
lending or investment of deposits of money from
the public, repayable on demand or otherwise and
withdrawable by cheque, draft, order or otherwise’.
• “Bank is an establishment which makes to
individuals such advances of money as may be
required and safely made and to which individuals
entrust money when not required by them for use.”
• Many investors earn money by investing in bank
securities.
• Securities issued by banks are in standard form containing
the following details:
• 1. Name of the security.
• 2. Date of registration of the security.
• 3. Full name and address of the issuer.
• 4. Nominal value of the security.
• 5. The name of the owner.
• 6. Time of payment.
 Securities Issued by the Banks
• Following are the securities issued by the banks:
• 1. Banknote –
A banknotes is a negotiable promissory note issued by a bank payable
to the bearer on demand. The amount payable is stated on the face of
the note.
Banknotes are considered legal tender and make up the bearer forms
of all modern money.
Banknotes are also known as a ‘bill’ or a ‘note’. Bill is a security
certifying the unconditional cash and unilateral debt obligation of the
issuer (bank) to pay when due, a certain amount of money to the note
holder (owner of the notes).
Bank bill basically has the nature of the deposit and is issued by the
bank-the issuer of the client on the basis of the deposit in the bank,
certain amount of funds.
 Issue of Banknotes
• According to S. 22 of the RBI Act, 1934, RBI shall have the sole
right to issue bank noes in India.
• According to S. 38 of the RBI Act, 1934 the CG shall put into
circulation rupee coins and one rupee currency notes through RBI
only.
• One rupee notes bear the signature of the Finance Secretary
(MOF). According to RBI, banknotes shall be of the
denomination value of Rs. 2, 5, 10, 20, 50, 100, 500 and 2000 and
of such other denomination values as the central government may
specify on the recommendation of the central board of RBI.
• Bank notes are issued under the signature of the governor of the
RBI.
 Nature and Classification of
Deposits
• 2. Deposits –
• Two classes of deposits have to be distinguished
• A) Deposit of Securities:
• The growth of stock companies and the development of the
credit system has brought into existence a great variety of
securities the safe-keeping of which is a matter of prime
importance.
• It rarely happens that the owners of these securities possess
the same facilities for their safe keeping as do banks whose
business by its very nature compels them to provide large,
strong, fire proof safes and every other means for protection.
• The enormous quantities of these should, therefore be
entrusted to the safe-keeping of banks and that special
institutions for the performance of this function should
have developed in large business centres.
• When deposits are large, special safes and strong rooms
are provided which are equipped with boxes for each
depositor.
• In every case, the securities deposited are kept by
themselves, and are returned to the depositor upon
demand, the bank merely acting as his agent and in no
case acquiring right of ownership in the paper itself.
• B) Deposits of Money:
• Most important form of deposit is that of money. People of all
classes deposit with banks the greater part of the money which
comes into their hands.
• Ordinarily one keeps in hand such amount that is necessary to
make small purchases. Merchants usually make a deposit of the
cash received everyday.
• People with salaries and wage earners deposit their funds
monthly or weekly as they are received.
• It can thus be said, that the greater part of money of a country
sooner or later is deposited in the banks and used as the basis
for banking operations.
Changing Functions of Banks in
Recent Times
• Innovations in banking have become the order of the
day and the concept of the bank as a mere manager of
liquidity belongs to the past.
• New services, both credit and non-credit one’s have
been introduced and existing services developed by
banks throughout the world as they meet increasing
competition for business from within the banking
industry and from without, fill-up in their range of
services to steal a march over their competitors by
trying to satisfy the needs of their present and
potential customers.
• The banks, world over, are becoming financial
supermarkets in which a wide variety of services
can be purchased and often conduct businesses that
do not always resemble the traditional banking.
• Many significant changes are taking place in our
country in response to changes in national and
international economic environment.
• These changes have also affected the financial
sector and are forcing it to move towards a
deregulated and more competitive environment.
• 1. Bank Draft:
It is a cheque drawn on a bank’s funds after accepting the
amount from the issuer’s account. A bank draft is a payment
on behalf of a payer that is guaranteed by the issuing bank.
A draft ensures the payee, a secure form of payment.
Obtaining a bank draft required depositing funds equal to the
cheque amount and applicable fees with the issuing bank.
The bank issues a cheque to the payee drawn on the bank’s
own account. The remitter’s name is noted on the cheque but
the bank is the entity which makes the payment. A bank
cashier of officer signs the cheque.
• A bank draft is required by a seller when the seller
has no relationship with the buyer, or hen the
transaction involves a large sale price or the seller
believes collecting payment might become difficult.
• For ex. A seller requires bank draft when selling a
house or an automobile.
• 2. Credit – Debit Cards:
Credit cards are an easy method To Buy Now and Pay
Later. The credit card is a double aged tool which
enables one to pay for purchases with the card instead of
paying cash on the spot.
Thus they are extremely convenient as they can do away
with the necessity of carrying large sums of cash around.
Further, the card becomes handy when a person on tour
finds that he has run out of cash but has to pay a bill
incurred which can be defrayed by using the credit card.
• Another feature of the usage of the card is that the
risk of loss of money is totally absent and the card,
even if lost, can be obtained again, provided it is
intimated to the issuer immediately.
• If one is trapped for cash, he can withdraw money at
specified branches of the bank up to a specified
monthly limit. Thus, we find that credit card takes
care of liquidity problem of individuals. It is a tool
at hands of its holders to tide over a budget deficit
for a short period of time
Debit Cards, on the other hand do not allow credit.
The account usually debited immediately or on the
same day when the card has been used to draw money
are make purchases. No credit period is allowed.
• 3. ATMs:
Automated Teller Machines are increasingly
providing functionalities that take away the routine
teller functions and are an effective personalized
secure customer information and cross-sell channel
There are two types of ATMs; Exterior which are
located in places like malls and interior which are
located within the bank premises.
This will facilitate faster access to funds for
consumers as well as cost and operational efficiencies
for the banks.
• 4. Mobility in Banking:
Mobile phone banking takes one step ahead of internet and tele-
banking. The customer can do a banking activity, without even
making a phone call. The most obvious advantage of mobile
phone banking over tele-banking and internet banking is that it is
truly “Any Time Any Where Banking”.
There are broadly two types of services that a customer could
avail through mobile phone.
a) Alert Services – Alert services helps a customer keep a track
of the activity on his accounts and
b) Requests – Allows a customer call for information pertaining
to his bank accounts and transactions.
• 5. Payment of Utility Bills:
The customers can now even pay telephone, mobile
and electricity bills over the net.
• 6. Wealth Management:
Banks have begun to recognize the potential of wealth
management as a very profitable business. The
banking institutions aim to help individuals to preserve
and systematically grow their wealth.
Most banks offer basic investment advisory services
under the umbrella of their priority banking services.
Banks offer complementary financial planning
services to help one to know exactly what to do with
ones money, so that one realizes the financial
objectives.
Banks organize investor meets; circulate market
information reports and more under their banking
investment advisory services.
 SARFAESI ACT, 2002
• The full form of SARFAESI Act as we know is Securitization
and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002.
• Banks utilize this act as an effective tool for bad loans (NPA)
recovery.
• It is possible where non-performing assets are backed by
securities charged to the Bank by way of hypothecation
(Hypothecation is the practice where a debtor pledges
collateral to secure a debt or as a condition precedent to the
debt) or mortgage or assignment.
• Upon loan default, banks can seize the securities (except
agricultural land) without intervention of the court.
• SARFAESI is effective only for secured loans
where bank can enforce the underlying security ex.
hypothecation, pledge and mortgages.
• In such cases, court intervention is not necessary,
unless the security is invalid or fraudulent.
However, if the asset in question is an unsecured
asset, the bank would have to move the court to file
civil case against the defaulters.
 How it Works?
• The SARFAESI Act, 2002 gives powers of “seize
and desist” to banks. Banks can give a notice in
writing to the defaulting borrower requiring it to
discharge its liabilities within 60 days. If the
borrower fails to comply with the notice, the Bank
may take recourse to one or more of the following:
• 1) take possession of the security for the loan/Sale or
• 2) lease or assign the right over the security/ Manage
the same or
• 3) appoint any person to manage the same.
• The SARFAESI Act also provides for the
establishment of Asset Reconstruction Companies
(ARCs) regulated by RBI to acquire assets from
banks and financial institutions.
• The Act provides for sale of financial assets by
banks and financial institutions to asset
reconstruction companies (ARCs). RBI has issued
guidelines to banks on the process to be followed
for sales of financial assets to ARCs.
• An asset reconstruction company is a special type of
financial institution that buys the debtors of the
bank at a mutually agreed value and attempts to
recover the debts or associated securities by itself.
The asset reconstruction companies or ARCs are
registered under the RBI and regulated under the
Securitisation and Reconstruction of Financial
Assets and Enforcement of Securities Interest Act,
2002 (SARFAESI Act, 2002). The ARCs take over a
portion of the debts of the bank that qualify to be
recognised as Non-Performing Assets.
• Thus ARCs are engaged in the business of asset
reconstruction or securitisation or both. All the
rights that were held by the lender (the bank) in
respect of the debt would be transferred to the ARC.
The required funds to purchase such debts can be
raised from Qualified Buyers.
BACKGROUND OF THE ACT
• The previous legislation enacted for recovery of the
default loans was Recovery of Debts due to Banks
and Financial institutions Act ,1993.
• This act was passed after the recommendations of
the Narsimham Committee – I were submitted to
the government.
• This act has created the forums such as Debt
Recovery Tribunals and Debt Recovery Appellate
Tribunals for expeditious adjudication of disputes
with regard to ever increasing non-recovered dues.
• However, there were several loopholes in the act and these
loopholes were mis-used by the borrowers as well as the
lawyers.
• This led to the government introspect the act and another
committee under Mr. Andhyarujina was appointed to
examine banking sector reforms and consideration to
changes in the legal system .
• This committee recommended to enact a new legislation for
the establishment of securitization and reconstruction
companies and to empower the banks and financial
institutions to take possession of the Non performing assets.
• Thus, via the SARFAESI act, for the first time, the secured
creditors were empowered to recover their dues without the
intervention of the court.
• PRE-CONDITIONS:
The Act stipulates four conditions for enforcing the rights by a
creditor.
1) The debt is secured.
2) The debt has been classified as an NPA by the banks.
3) The outstanding dues are one lakh and above and more than
20% of the principal loan amount and interest there on.
4) The security to be enforced is not an an Agricultural land.
 METHODS OF RECOVERY
• According to this act, the registration and regulation of
securitization companies or reconstruction companies is
done by RBI.
• These companies are authorized to raise funds by issuing
security receipts to qualified institutional buyers (QIBs),
[(QIBs) are those institutional investors who are
generally perceived to possess expertise and the financial
muscle to evaluate and invest in the capital markets]
empowering banks to take possession of securities given
for financial assistance and sell or lease the same to take
over management in the event of default.
• This act makes provisions for two main methods of
recovery of the NPAs as follows:
1) Securitization –
Securitization is the process of issuing marketable
securities backed by a pool of existing assets such as
auto or home loans. After an asset is converted into a
marketable security, it is sold. A securitization
company or reconstruction company may raise funds
from only the QIB (Qualified Institutional Buyers) by
forming schemes for acquiring financial assets.
• According to the Securitization Act only financial
institutions and banks can securitize their
financial assets. Consider this example where GNB
Bank gives out loans to customers known as the
obligors. This will be maintained on its balance
sheet as assets, collecting principal and interest. 
• The bank will hold on to these assets until maturity
and hence the funds of the bank are blocked in these
loans. Now in order to meet the increasing
requirement of the fund bank would have to raise
more funds from the market.
• Securitization is the method to unlock these blocked
funds. It is done by transferring the assets from the
originator which is GNB Bank in this case to the Special
purpose vehicle (SPV). 
• An SPV is a distinct entity that has been formed
absolutely for the purpose of facilitating the securitization
process and provides funds to the originator.
• Also another thing which needs to be considered is that
the assets that are being transferred to the SPV need to be
similar in terms of its maturity, risk profile and underlying
asset.
• The SPV will act as an intermediary who divides the
assets of the originator into marketable securities.
• These securities are issued to the investors by the
SPV which are known as pass through certificates
(PTC’s). The investors in such PTC’s are
banks, mutual funds, other financial institutions,
government etc. In India specifically it’s only the
Qualified Institutional Buyers (QIB’s) who have the
financial capacity and ability to take risks are
allowed to invest in PTC’s. 
• The difference between the interest payable by the
obligor and the return to the investors is the service fee
that the SPV earns. These securities are rated by the
credit rating agencies which are used to inform the
investor about the quality of the security and the risk
involved.
• After the assets have been securitized, they are
removed from the books of the bank and the cash flows
from the securitization can be used to give new loans.
So for GNB bank securitization is an effective option to
corporate debt or equity to meet their cash requirement.
• 2) Asset Reconstruction:
Enacting SARFAESI Act has given birth to the Asset
Reconstruction Companies in India. It can be done by
either proper management of the business of the
borrower, or by taking over it or by selling a part or
whole of the business or by rescheduling of payment
of debts payable by the borrower enforcement of
security interest in accordance with the provisions of
this Act.
 Debts Recovery Tribunals
• Role of DRTs:
The primary objective and role of DRT is the recovery of
money from borrowers which is due to financial
institutions and banks. 
The Tribunals power is restricted to try and settle cases
recuperation of advances from NPAs as stated by the
banks under the RBI guidelines.
The Tribunal has all the powers vested with the District
Court. The Tribunal also has a Recovery officer who helps
in executing the recovery Certificates as passed by the
Presiding Officers.
• DRT followed the proficient legal procedure by
emphasizing on speedy disposal of the cases and
fast implementation of the final order.
 Jurisdiction of DRTs
• Section 17 of the RDDBFI Act, 1993 vests the authority
with  DRT to entertain applications from banks and
financial institutions for recovery of debts which are due
to such banks and financial institutions.
• Section 18 of the Act bars all other Courts from the
adjudication of matters relating to debt recovery apart
from the Supreme Court and High Court, exercising
jurisdiction under Article 226 and 227 of the Constitution.
• In other words, relief against the order passed by the
DRAT can be pursued only by High Court or Supreme
Court.
 DRT PROCESS
• FILING OF APPLICATION:
An application can be made to DRT either through
direct application or through SARFAESI route.
• 1. Application Route:
The recovery procedure through this way requires
making of the application to the DRT and paying off
the required fees.
DRT location chosen under this route matters.
Currently, there are 33 DRTs in 22 locations. 
Section 19 of the RDDBFI Act mentions the
prerequisites for a choice of DRT to make an
application.
Bank or Financial Institution can make an application
to DRT which has jurisdiction in the region to which
the financial body carries business.
An application may likewise be filed to a specific
DRT if the cause of action completely or in part
emerges within the limits of its jurisdiction.
• 2. SARFEASI Route:
An application can likewise be made to the DRT
under the Securitization and Remaking for
Enforcement of Security Interest Act (SARFAESI),
2002.
SARFAESI perceives the need to strengthen the
rights of secured creditors to help them in recouping
their dues. It sets out the procedure for doing as such
without the intercession of courts or councils.
Section 13 (2) of the SARFAESI Act states that a notice is
to be sent to the borrower after a loan has been classified
as a Non-Performing Asset (NPA) by the secured creditor.
This notice must mention the amount that needs to be
repaid in full by the borrower within a period of 60 days.
If the borrower fails to comply with it, then the creditor
would be held entitled to exercise his rights under Section
13 (4) of the Act by taking ownership of the secured asset
including the right to transfer the asset by way of lease,
taking over management of the business or to appoint any
person to manage the secured asset
As per Section 17 of the SARFAESI Act, borrowers can
appeal against any action taken by the creditor under
section 13 (4).
• Service of Summon/Notice
The Registrar of DRT or any other officer that has been
authorized by the Presiding Officer will issue a notice
which will be served by the applicant to the defendant.
The summon also includes the paper book of the
petition which is served to defendant generally by hand
or registered post with Acknowledgement Due (AD) or
speed post. With the consent, of Registrar,
Summon/Notice can likewise be additionally sent
through email or fax, in any case, in such occasion, it
must be guaranteed that defendant gets a duplicate of
the paper book on the primary date of his appearance.
 HEARING OF THE CASE BEFORE
PRESIDING OFFICER

• Filing of reply
The defendant is required to file for the reply within one month
from the date of service of the notice. The defendant can be
allowed to file the reply after some time only with the
permission of the DRT. DRT may proceed ex-parte if the
defendant even after the extension of time is not able to file his
reply.
• The claim for counterclaim
The defendant can file for counterclaim only on the first
hearing. After that, the permission of DRT would be required.
The claim for counterclaim will have the same impact as a
countersuit would in any proceedings.
• Admission of liability by the defendant
The Presiding Officer would pass an order if the defendant
admits his liability, instructing him to pay the required
amount within a period of 30 days from the date of the
order of DRT.
• Interim Order by DRT
As per Section 19(12) of RDDBFI, DRT has the power to
pass an interim order against the defendant, restricting him
from disposing or transferring his property without the prior
assent of the Tribunal. DRT is also authorized to confine the
defendant for a period of three months on the ground of
disobedience of any order issued under Sections 19(12),
19(13) and 19(18) of the SARFAESI Act.
• Judgement and Recovery Certificate by DRT
DRT after hearing both the parties and their submissions
would pass the final judgement within 30 days from hearing.
DRT will issue a Recovery Certificate within 15 days from the
date of judgement and pass on the same to Recovery Officer.
RC shall have the same effect as the decree of the civil court.
• Appeal
An aggrieved party can file for an appeal to Debt Recovery
Appellate Tribunal (DRAT) having the jurisdiction to entertain
the matter, against the order passed by the Debt Recovery
Tribunal (DRT) within 30 days from the date of passing of the
order by DRT. However, an appeal will not be entertained if
the judgement given by the DRT was discharged with the
consent of both the parties. DRAT shall entertain the appeal
after the expiry of 30 days from the date of passing the order
by DRT if he is satisfied that there was a sufficient cause for
the same.
• In Axis Bank v/s SBS Organic Pvt. Ltd. & Ors.,
the Supreme Court held that the appeal in DRAT
would be entertained only on the condition that the
borrower deposits the 50% of the amount in  terms
of the order passed by DRT or 50% of the sum due
from the borrowers as asserted by the secured
creditor, whichever is less. The DRAT in his
discretion may reduce the amount to 25%.