FINANCAL SERVICES

LEGAL & REGULATORY

ENVIRONMENT
BANKING LAW
& REGULATION
 NEGOTIABLE INSTRUMENT ACT 1881
• The Act relates to negotiable Instruments viz
– Promissory notes
– Bills of exchange
– Cheques

• Negotiable Instruments (Amendment) Act 1988 has

inserted new section 138 which incorporated penalties for
dishonour of cheque because of insufficient funds

• Negotiable Instruments (Amendment & miscellaneous

provisions ) Act 2002 expedited criminal proceedings &
modify the requirements of E commerce
 MISCELLEANOUS TERMS
• Negotiable by statute
– PN , BOE , Cheques
• Negotiable by Usage
– Bank draft. Pay orders , Railway receipt , Hundies
• Bearer instrument
– Person who is lawful holder of bearer instrument can
obtain payment of it
• Order instrument
– When it is expressed to be payable to a particular
person , when the “bearer “ word is struck off
• Inland instrument
– Which is drawn in India upon a resident person &even
though payable in foreign country
 MISCELLEANOUS TERMS
• Foreign instrument
– Drawn outside India , drawn on person who is resident
outside India whether made payable outside or inside
India
• Demand instrument
– An instrument like PN or BOE where in time of
payment is specified
• Ambiguous instrument
– Treated by its holder as BOE or PN , like when drawer
& drawee are same or drawee is fictitious
• Inchoate or incomplete instrument
– When one person signs & delivers another person an
instrument which is blank or incomplete giving
authority to another person to complete it
 PROMISSORY NOTE (Q 100)
• Ramesh wrote a note “On demand I promise to pay Mohan a
sum of 2 Lacs only for value received”

• Instrument in writing ( not being Bank or currency note) ,

containing unconditional undertaking , signed by a person
(maker) to pay a sum of money only to or to order of certain
person (payee) or to the bearer of the instrument

• PN cannot be made by electronic means (IT Act not applies)

• “I promise to pay Mohan on order Rs 1000.”

• “I acknowledge myself to be indebted to Mohan for Rs 2000

to be paid on demand for value received”
 ESSENTIALS OF PN (Q100)

• It must be in writing
• It must contain an express promise to pay
• The promise must be definite and unconditional
• Maker must sign the instrument
• Instrument must clearly point out the maker
• Sum payable must be certain without any scope of
addition or subtraction
• The payment must be in money & not in kind
• Must point out the receiver
 BOE (Q 101 )
• Mr. Mohan makes an instrument drawn on kanpur which states
“three months after the date pay to Sohan the sum of 1 Lac
for value received”

• Instrument in writing containing an unconditional order ,

signed by maker (drawer ) , directing a certain person
(Acceptor) to pay a certain sum of money only to (payee) or to
order of , a certain person or to the bearer of the instrument
(Holder).

• The person who indorses the bill in favour of another person is

called indorser & the person in whose favour bill is indorsed is
called as indorsee
 HOLDER IN DUE COURSE (Q 102)
• Person is Holder if he is entitled in his own name (named in
instrument )
– Possession of instrument
– To recover or receive amount due from parties

• Holder in due course can claim to be so , only if it can be

proved that
– He acquired the instrument for valuable consideration
– He should show that for consideration he has become
payee or indorsee
– Instrument is acquired at any time before it become
payable
 HOLDER IN DUE COURSE (Q 102)
• Holder in due course should act honestly & cautiously that
there is no defect in title while acquiring an instrument

• Durga Shah Mohan lal Bankers Vs Governor in council

• Held - that mere failure to prove absence of negligence

would not disentitle plaintiff (Banker) from enforcing a claim
as holder in due course
– Bank purchased two cheques indorsed by payee
– Cheques were dishonoured
– Drawer denied liability on ground that payee has failed to
do his promise
– Held bank entitled to recover amount & it was not
required to check whether payee has fulfilled promises
 CHEQUES

• Its a bill of exchange drawn on a specific Banker &

includes electronic image of truncated cheque (cheque
truncated by clearing house immediately on generation of
electronics image) in electronic form

• Signed by person (Drawer) & contains an unconditional

order to a specific banker (acceptor) to pay on demand a
certain sum of money to specified person (payee) or bearer
of the instrument (holder)

• Cheque in electronic form is mirror image of paper cheque

generated by secured system with use of digital sign
 MODES OF CROSSING(Q103)
• General crossing
– Drawee bank not makes payment otherwise then to
bank
• Special crossing - “not negotiable” & name of banker
– Drawee make payment only to bank to whom the
cheque is crossed
• Restrictive crossing – “account payee”
– Credited in account of payee only
• Not negotiable crossing-
– Restrict the further transferability
– Protects miscarriage & dishonesty in transit
 LIABILITY OF INDORSER(Q105)
• Every subsequent Indorser is compelled to pay to holder of
instrument if the instrument is dishonoured
• But liability to pay commences when instrument is
delivered to transferee
• Due notice of dishonour should be sent to indorser
• Commercial Finance Vs Thressia
– Where cheque returned unpaid with words" refer to
drawer” , the notice should be given to indorser to
make him liable
– But he may give a qualified indorsement using words
“without recourse to me”
 SECURITIZATION
&
RECONSTRUCTION OF FINACIAL ASSETS
&
ENFORCEMENT OF SECURITIES INTEREST
ACT 2002 (SARFAESI)
 SARFEASI
• 29 Debt recovery tribunals & 5 DRAT in existence

• But no performance for recovery or control of NPA

• So the Act was enacted in 2002 to whole of India

• Objectives
– Legal framework of securitization of assets
– Transfer NPA to ARC for disposal
– Enforcement of security interest without courts
intervention
 SECURITIZATION
• Sell the secured NPA to Securitization company through
special purpose vehicles

• The Securitization Company takes over financial assets &

treated as secured creditor

• Formulates separate scheme for each set of assets & invites

Qualified institutional Buyers (QIB)

• Securitization company issues security receipts to QIB

• Securitization company will realise the assets & redeem

the investment by paying proceeds to QIB
 ASSETS RECONSTRUCTION
• Involves both securitization & enforcement of securities
• ARC has to registered with RBI

• Securitization
– ARC acquire NPA & issue debentures / Bonds to them
– ARC issue security receipts to QIB

• Reconstruction
– Rescheduling of payment of dues
– Enforcement of security interest
– Settlement of dues
– Taking possession of securities
 ENFORCEMENT OF SECURITIES(Q108)
• Security interest – rights , title in favour of secured creditor
• Secured creditor can enforce secured debt once it is classified as
NPA under regulation of RBI Act
• Issuance of notice to borrower ..60 days ..secured creditor can
– Possession of assets
– Take over or management
– Transfer by sale / lease (notice of 30 days before price
fixation)
• Borrower raise objections within 60 days which is to be
clarified
• Aggrieved borrower can approach to DRT within 45 days of
measures taken …..second appeal in DRAT
• DRT to dispose off within 60 days (max 4 months)
• In DRAT deposit 50% of debt & appeal in 30 days of DRT
order
SECURITIES LAW &
REGULATION
 MARKET REGULATION BY COMPANIES ACT
• Regarded as elementary & most comprehensive enactments
regulating the securities market viz-
– Kinds of share capital
– Issuance of prospectus
– Application to recognised stock exchange
– Allotment of shares
– Modes of raising of share capital – Public , right or bonus
issue
– Issue at premium , discount , sweat equity , redemption
• But to regulate market certain specific enactments needed
– Securities Contract (Regulation Act ) 1956
– Securities & Exchange Board of India Act 1992
– Depositories Act 1996
 SEBI
• SEBI was set up in 1988 as non statutory body to promote the
growth of securities market & to provide investors protection

• Objectives
– To promote fair dealing by issuers of securities
(misstatement in prospectus)
– Ensuring market as place to raise fund at low cost
– Protection to investors for steady flow of savings
(speculation )
– Develop code of conduct for brokers, merchant bankers
(Plumping & dumping , Blab & grab)

• In 1992 SEBI Act was enacted and since then it has become a
statutory organisation with enormous powers
 POWERS OF SEBI
• Power of Civil court as per Civil Court procedure
– Production of Books of account or any document of
Companies
– Summoning the presence of any person
– Inspection of Books & documents of Companies
– Issuing commission for examination of witness or
documents
– Suspend trading or prohibit anyone to access securities
market
– Regulation/prohibit for issuance of capital , prospectus ,
transfer of securities & Advertisement soliciting investors
– Levy Fees or hear appeal
– Inspection of Books to check insider trading
 STOCK EXCHANGES

• To deal with the products either to sell or purchase

• 24 recognised stock exchanges in India

– Bombay stock exchange (BSE)
– National stock exchange (NSE)
– Over the counter market (OTCEI)
 BSE
• In 1875 share & stockbrokers association was established
• A non profit organisation
• BOLT ( BSE Online Trading System)
• Covers 227 centers having VSAT (very small aperture
terminals) & TWS (traders work station)
• Objects
– Transparency in deals
– Improvement in liquidity
– Elimination of mismatches
– Mitigation of risk in settlement
– Instant dissemination of information
– Increase market depth
 NSE
• To break monopoly of BSE , in 1992 it was established by
some institutional investors
• Online trading system NEAT (National exchange of
Automated Trading), having 4 markets
– Normal market - order of regular lot size
– Odd lot market - order whose size is less than regular
– Auction market – auction initiated by Exchange on
behalf of trading members
• Set up as Public limited company
• Operates various committee viz for settlement procedures ,
risk containment
• Committee are manned by Professionals & trading
members
• Exchange floor has been brought to investors door step
 OBJECTIVES OF NSE
• To facilitate nationwide trading of equity ,debt & hybrid

• To ensure equal access to investors through out the

country

• To provide fair & transparent securities market using

electronic trading

• To enable shorter settlement cycles

• To meet current international standards of markets

 OTCEI
• Incorporated U/S 25 of Companies Act
• Promoters are UTI, ICICI, IDBI, IFCI, LIC, GIC SBI
capital market & CAN bank financial services
• To promote access to small & medium sized companies to
capital market
• Companies with an issued capital ranging 30 Lakhs to 3
Crores are eligible to list
• Good mode for closely held companies to offer their shares
to public
• OASIS system- trading method combining features of
Quote & Order driven system
• In 1996 , it has started permitting trading of equity shares
of unlisted companies
 REGULATION OF STOCK EXCHANGES

• Application for recognition of stock exchanges to SEBI

• CG Power to call for periodical returns
• Power of stock exchanges to make rules , bye laws
• SEBI can ask Exchange to amend rules within 2 months of
order
• SEBI can declare any trading contracts illegal
• SEBI can prohibit any person to enter into any trading to
avoid speculation
• SEBI regulate & control dealing in spot delivery contracts
 LISTING OF SECURITIES
• Admission of securities for trading on a stock exchange
through a formal agreement between exchange & company

• Companies Act makes compulsory for companies

intending to offer share /debentures to public to get their
securities listed on exchange

• Allotment are void if securities could not get listed within

10 weeks from the closing of the issue
 ADVANTAGES OF LISTING
• To Company
– Companies enjoy concession in Direct taxes
– Company gets national & international recognition
– FI / Bankers extends credit facilities easily
– Mobilise resources from SH through Right issue
– Ensures wide distribution of shareholding
• To investors
– Liquidity ensured
– Rights entitlement can be disposed off in market
– Official quotation for Tax purpose
– No secrecy of price realisation
– Take over announced publicly
– Furnish of Unaudited / audited financial results on timely
basis
 BUY BACK OF SECURITIES
• Purchase of its own securities by a company if authorised by
AOA and passed by a special resolution
• Buy back can be made from own resources & governed by
section 77 A of Companies Act
• Buying back is also governed by SEBI (Buy back of securities )
regulations 1998
• A listed company buy back from open market through stock
market or by tender offer
• Unlisted has to buy back from existing SH or from employees if
they were allotted shares in Stock option
• Private ltd & unlisted are governed by Private ltd & unlisted
company ( Buy back of securities ) regulations 1999 framed by
CG
• Not more than 10 % of outstanding shares can be bought back
• Buy back should be done from free reserves only
 DEPOSITORIES
• Company which is granted a certificate of registration
under sub section (1A) of section 12 of SEBI Act 1992
• Main function is to dematerialise securities & keeps
securities of participating investors in Demat form
• Earlier certificates were lost /mutilated/stolen /misplaced
• NSDL in 1996 was formed by IDBI /UTI /NSE
• Advantages
– Filling up of transfer deeds not necessary
– No bad deliveries
– Exemption of paying stamp duty on transfer
– Shares transferred within a day after completion of
settlement
– No scope of forgery of certificates
 DEPOSITORIES
• Investors opens an account with depository through
Depository participant (DP)

• Depository provides custodial services & transfers

ownership of securities

• DP are conduit though which one can deal with NSDL

• They maintain investors securities account balance from

time to time & intimate investors about his holding

• Investors can open account with more than one DP

INSURANCE LAWS
 ELEMENTS OF INSURANCE CONTRACT
• General Insurance companies
– Insurance Act 1938
– Marine Insurance Act 1963
– Public Liability Act 1991
– Motor Vehicle Act 1988

• Life Insurance companies

– In addition to above Life Insurance act 1956

• It is a contract by which one party undertakes to make good the

loss of another in consideration of a sum of money on
happening of a certain event
 ELEMENTS OF INSURANCE CONTRACT
• PROPOSAL (OFFER )
– Proposal in standard format made by insured
• ACCEPTANCE
– Proposal form received by insurer is processed &
assessed.
– Insurer informs (policy) promisor that proposal is
accepted
• COMUNICATION
– Insured communicates offer & insurer communicates
acceptance
• CONSIDERATION
– Consent to pay premium by proposer & promise to
compensate or indemnify ( to make loss good ) by
insurer
 ELEMENTS OF INSURANCE CONTRACT
• Parties to contract
– Insurer & insured which may be an individual or firm
or body corporate
• Premium
– No risk unless premium is paid
– Policy effective from date of acceptance
– But risk cover from date of payment of insurance
premium
• Policy term
– Term of policy means the duration of risk coverage
– In case of general insurance term is always one year &
renewed every year
 LEGAL PRINCIPLES OF INSURANCE
• Uberrimae fide
– Good faith
– Duty of disclosure of facts is presumed with good
faith or claim can be denied

• Insurable interest
– Insurance contract being a contract of uncertainty
treated a wagering agreement
– Wagering agreement are void under Contract Act
– In insurance contract it is insurable interest which
makes contract valid
– E g own life , husband & wife , parent & child, other
relations like Debtor , director , partner
 LEGAL PRINCIPLES OF INSURANCE
• PRINCIPLE OF INDEMNITY
– Insurer promises to indemnify the loss caused to insured
• PROXIMITY OF CLAUSE
– Payment of compensation depends upon nature &
proximity of cause resulting in loss
• RISK
– Insurer undertakes to protect insured from loss
• MITIGATION OF LOSS
– Insured must take all steps to minimise loss as a prudent
person would do in such circumstances or insurer can
dent claim
 LEGAL PRINCIPLES OF INSURANCE
• SUBROGATION
– Transfer of rights & remedies to insurer who has
indemnified total loss
– This happens in case of fire & marine insurance

• CONTRIBUTION
– Insured is prevented from recovering more than loss
despite he has several policies
– If policies are more then each insurer is to contribute
ratably
 REINSURANCE
• Agreement between ceding company & reinsurer

• Ceding company cedes risk & reinsurer accepts

• Reinsurance premium is paid by ceding company

• Reinsurance commission will be paid by reinsurer

company

• In event of claim , ceding company gets part of claim from

reinsurer company
 DOUBLE or MULTIPLE INSURANCE
• Insurance of same risk with more than one insurer

• Total sum insured exceeds the value of subject matter

• Perfectly lawful unless policy otherwise provides

• But in any case insured cannot claim more than the loss he
suffered (contract of indemnity)

• Purpose is protect the loss if anyone goes insolvent