When a company becomes a Banking Company

As per section 5c of THE BANKING REGULATION ACT, 1949 “Banking company means any company which transacts the business of banking in India.” Thus any company whether foreign or indigenous which transacts the business of banking in India is called a banking company. The word company is defined in the banking regulation act as “any company defined in section 3 of the Indian companies act, 1956; and includes a foreign company within the meaning of section 591 of that act.”

Banking on the other hand means “accepting for the purpose of lending or investment, of deposit of money from the public, repayable on demand or otherwise, withdraw able by cheque, draft, order or otherwise.”

A company as given in section 591 of Indian Companies act is a foreign company if it falls within any of the following classes:

1) Company incorporated outside India which has established a place of business in India before the commencement of this act.

2) Companies incorporated outside India which has established a place of business in India after commencement of this act.

Where not less than 50% of paid up share capital, whether equity or preference or partly equity or partly preference, of a company incorporated outside India and having an established place of business in India, is held by one or more citizens of India or by one or more bodies incorporated in India, whether singly or together. Such company shall comply with such of the provisions of this act as may be prescribed with regards to business carried on by it in India, as if it where incorporated in India.

BANKING as defined above is formed of the followings:

Ø  Acceptance of deposit. Thus the function is MOBALISATION OF

DEPOSITS.

Ø  The major purpose of taking deposits is lending and investments.

Ø  The deposited amount must be withdraw able through cheque draft order or otherwise.

Thus it must have power to receive deposits from customers and honouring theirs cheques. On the other hand GRANTING OF LOAN is a subject of rules and practice the bank has discretion in this matter. The field of banking cannot be extended to trading activities which not being incidental encroach upon substance of entry 26 in list ii of schedule Vll to the constitution.

The language in section 5(1) (c) is a little vague. It says that transacting the business of banking should be the business of the company. It is not that such business should have been transacted at any particular point of time. Notwithstanding that a banking company may not be transacting the business of banking at a particular point of time on account of supervening causes it will not cease to be a banking company. Thus a banking company at liquidation is still a banking company until it is dissolved by the order of court.

The section 5(1)(c) only states that banking shall be the principal business of an banking company. Though for a time being it suspends its operations.

A company taking deposits from public is not essentially an banking company:

Deposits from public are an important mode of finance in corporate sector. The term deposits include deposit of money with and include any amount borrowed by a company. A company can invite deposits from public. They cannot be treated as bankers. As they cannot honour cheques, drafts etc. on the other hand they do not practice banking as their principal business. The deposits that non banking companies take are regulated through THE ACCEPTENCE OF DEPOSITE RULES 1975.

BANKING COMPANY HAS A DEFINED SET OF WORK. THIS IS GIVEN IN SECTION 6. A NON BANKING COMPANY IS NOT LAMITED TO SUCH BY SUCH A THING.

THUS ANY COMPANY WILL BE A BANKING COMPANY WHEN:

Ø  IT MUST TRANSACT THE BUSINESS OF BANKING UN INDIA.

Ø  THE PRIMARY FUNCTION SHOULD BE BANKING.

AKASH KAPOOR

CA(FINAL) LLB 3RD YEAR.