(d) when the party entitled to notice cannot after due search be found; or the party bound to give notice is, for any other reason, unable without any fault of his own to give it. (e) to charge the drawers, when the acceptor is also a drawer. (f) in the case of a promissory note which is not negotiable. (g) when the party entitled to notice, knowing the facts, promises unconditionally to pay the amount due on the instrument. 8.14 NOTING Noting is nothing but an authentication or verification of the dishonour of an instrument by a notary public. Noting must be done after giving notice of dishonour but before initiating legal proceedings for the same. The Notary Public will then make a formal demand to the drawee or maker to honour the instrument. Noting is done on the instrument or in a paper annexed to the instrument and contains the fact of dishonour, date of dishonour, reason for dishonour, establishment of dishonour in case the dishonour is not seen on the face of the facts and the notary charges. However, the rights of the holder do not get affected even if the dishonour is not noted. 8.15 PROTEST If an instrument has been dishonoured by non-acceptance or non-payment, the Notary Public, after noting the dishonour as stated above shall issue a certificate to that effect and such a certificate is called a Protest. It contains the instrument or its literal transcript, name of the maker or drawee, fact and reason for dishonour, place and time of dishonour, signature of the Notary Public and in case there is acceptance or payment of honour, the fact of acceptance and payment and the parties thereto. 8.16 RULES AS TO COMPENSATION The Holder is entitled to receive the amount due from the instrument along with the expenses incurred in presenting, noting and protesting the instrument. If the maker or drawee resides in a different country, the compensation shall be calculated at the rate of exchange prevailing on the date of dishonour. An endorser who clears the instrument on behalf of the maker is entitled to claim the amount along with 6 to 18% interest and expenses incurred due to the dishonour, if he was liable on the instrument at the time of payment. The Holder can draw a bill for the compensation amount and annex the dishonoured instrument with it. Such a bill is 151 CU IDOL SELF LEARNING MATERIAL (SLM)
called the re draft. The same procedure and same compensation applies if the redraft is dishonoured. 8.17 SUMMARY A negotiable instrument is an acknowledgement of a debt or liability of any nature. Therefore, it amounts to a movable asset, being a proof or acknowledgment of a debt or liability, which is transferable. A promissory note is a promise made by a person to pay a certain amount to a specified person or to his order. A \"bill of exchange\" is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument. A \"cheque\" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form. A Bill of Exchange has to be presented for payment in the following three conditions: The bill is payable at a given time after acceptance or after sight. The expression ‘after sight’ means that the bill is payable at a given time after it has presented to his drawee for his knowledge. The bill expressly contains a clause with respect to acceptance before it is presented for payment. The bill is made payable at a place other than the place of residence or business as a drawee. If a bill or promissory note is payable after sight, it must be presented for the maker’s acceptance within the specified time or within a reasonable time. The bill must be presented at a place specified for presented and if not specified, at the place of the drawee’s residence or place of business. The Drawee can be given 48 hours for expressing his acceptance or rejection. If these conditions are not fulfilled, the bill is deemed to dishonoured for non-acceptance. The essential elements of making out an offence under section 138 are as follows: - 152 CU IDOL SELF LEARNING MATERIAL (SLM)
The cheque must be drawn on the account he holds and for the payment of a certain amount of money from the said account. The cheque must be presented with three months from the date of the cheque or within its validity period, whichever is earlier. The cheque must have been returned by the bank unpaid owing to insufficiency of funds in the bank account on which the cheque was drawn. The payee or holder must have sent a notice calling upon the drawer to pay the amount in the cheque within thirty days from the date of knowledge of dishonour of cheque. The drawer of the cheque must have failed to pay the said amount within fifteen days from the date of receipt of the notice issued by the payee. 8.18 KEYWORDS Negotiable Instruments: A negotiable instrument is an acknowledgement of a debt or liability of any nature. Therefore, it amounts to a movable asset, being a proof or acknowledgment of a debt or liability, which is transferable. Promissory Note: A promissory note is a promise made by a person to pay a certain amount to a specified person or to his order. Bill of Exchange: A \"bill of exchange\" is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument. Cheque: A \"cheque\" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form. 8.19 LEARNING ACTIVITES 1. A Draws on K bank a cheque payable to R and forwards it to his agent, S, with instructions to hand it over to R. S forges R’s indorsement and collects payment on the cheque. Decide on the position of K bank. ___________________________________________________________________________ ___________________________________________________________________________ 153 CU IDOL SELF LEARNING MATERIAL (SLM)
2. A draws a cheque on his banker for Rs. 50/- but carelessly leaving a blank space before the amount. The holder fills it up and makes the amount as Rs. 550/-. Decide on the claim of the banker. ___________________________________________________________________________ ___________________________________________________________________________ 8.20 UNIT END QUESTIONS A. Descriptive Questions: Short Questions: 1. What are the types of negotiable instruments? 2. Who are the parties to a bill of exchange, a promissory note and a cheque? 3. Examine to what extent a minor can be a party to a negotiable instrument? 4. Explain the meaning and effect of a) indorsement in bank b) special indorsement c) restrictive indorsement 5. Define negotiation. Distinguish between assignability and negotiability of an instrument. What is the importance of delivery in the matter of negotiation? Long Questions: 1. Distinguish between a) a bill and a note: b) a bill and a cheque. 2. What are the liabilities of a) the drawer: b) the endorsers (assuming that there are more than one) in case of a bill of exchange? 3. Explain clearly what is meant by negotiation. How is it effected and in what way is it different from an ordinary assignment? 4. In what different ways can a negotiable instrument be dishonoured? What steps should be taken by the holder of a dishonoured bill? 5. When is a negotiable instrument considered as dishonoured? what are the duties of a holder upon such dishonour? B. Multiple Choice Questions: 1. Which of the following section in the Negotiable Instruments Act deals with the Bill of Exchange? a. Section 5 b. Section 6 154 CU IDOL SELF LEARNING MATERIAL (SLM)
c. Section 4 d. Section 13 2. Which of the followings are not the Negotiable Instruments as defined by the Statute… a. Banker’s Note b. Promissory Note c. Bill of Exchange d. All the Instruments are Negotiable Instruments 3. Which of the following is/are true about the Negotiable Instruments Act, the Promissory Note is … a. Definition of Promissory Note is given in section 8 of the Negotiable Instrument Act b. Containing an unconditional undertaking c. To pay a certain sum of money only to a specific person or the bearer d. The seller is bound to accept the promissory note 4. A document was written and signed by the payer/maker a. (I), (II) and (III) b. (II), (III) and (V) c. (II), (III), and (IV) d. (I), (III) and (IV) 5. Dishonour of Negotiable Instrument by Non-Payment is covered under section in Negotiable Instrument Act 1882… a. Section 90 b. Section 91 c. Section 92 155 CU IDOL SELF LEARNING MATERIAL (SLM)
d. Section 93 6. Which of the following is/are true about Bill of Exchange? I. A bill of exchange requires in its inception two parties. II. A bill of exchange or “draft” is a written order by the drawer to the drawee to pay money to the payee. III. Bills of exchange are used primarily in international trade and are written orders by one person to his bank to pay the bearer a specific sum on a specific date. IV. Definition of ‘Bill of Exchange’ is mentioned in Section 6 of the Negotiable Instrument Act. a. (I) and (IV) b. (I), (II) and (IV) c. (II) and (III) d. (III) and (IV) Answers 1. (a) 2. (d) 3. (b) 4. (c) 5. (c) 8.20 REFFERENCES 156 Textbooks: Elements of Mercantile Law by N.D. Kapoor Mercantile Law by Garg Chawla Reference Books: Legal Aspects of business by Pathak Akhileshwar Legal Aspects of Business by P.K. Pandhi Websites: Manupatra.com CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 9: REGULATION OF BANKING AND INSURANCE SECTOR Structure 9.0 Learning objectives 9.1 Introduction 9.2 Credit control policy of the reserve bank of india 9.3 Difference between general methods of control and selective methods of control 9.4 Methods of credit control 9.5 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 9.6 Registration under SARFESI Act 9.7 Securitisation and reconstruction of financial assets 9.8 Banking Reglations Act, 1949 9.9 Reserve Bank of India Act, 1934 9.10 Foreign Exchange Management Act, 1999 9.11 Regulation of Insurance Sector in India 9.12 Summary 9.13 Key words 9.14 Learning acivities 9.15 Unit end questions 9.16 References 9.0 LEARNING OBJECTIVES After studying this unit, you should be able to: 157 State the various modes of credit control exercised by RBI Explain the essence of SARFESI Act Describe the concept of Statutory Liquidity Ratio Describe the concept of Cash Reserve Ratio CU IDOL SELF LEARNING MATERIAL (SLM)
Explain the role of RBI Give an outline of the Banking Regulations Act, 1949, Reserve Bank of India Act, 1934 and Foreign Exchange Management Act, 1999 9.1 INTRODUCTION Banking services are used widely today by almost all classes and sects of the society and is considered one of the essential services. Banking in the legal arena does not limit itself to one legislation. There are a number of laws that govern and affect the banking sector. However, the prominent ones are Banking Regulation Act, 1949, Reserve Bank of India Act, 1934 and SARFESI Act, 2002. The main authority governing and regulating the banking sector is the Reserve Bank of India. The Reserve Bank of India has enormous powers with respect to the banking sector, so much so that it has the ability to even alter the money market. Therefore, bankers are governed by the RBI and the provisions of Banking Regulation Act, 1949, Reserve Bank of India Act, 1934 and SARFESI Act, 2002. 9.2 CREDIT CONTROL POLICY OF THE RESERVE BANK OF INDIA One of the main functions of the Reserve Bank of India is to control or regulate the credit given by the banks. This control is exercised only to make sure the banks do not generate excessive credit. Credit Control methods can be classified into two categories, namely quantitative and qualitative, which are also called General and Selective. General or Quantitative control, as the name suggests regulates the amount of credit given. Qualitative Control refers to the eligibility of the person availing credit and how a bank should assess an application for loan and the eligibility of an applicant. 9.3 DIFFERENCE BETWEEN GENERAL METHODS OF CONTROL AND SELECTIVE METHODS OF CONTROL BASIS GENREAL METHODS OF SELECTIVE METHODS OF CONTROL CONTROL 158 CU IDOL SELF LEARNING MATERIAL (SLM)
APPLICATION Applies to all Debtors and creditors Applies to a specific set or sector of without any reservation or exception. debtors INFLUENCE Influence the flow of credit in the whole Influence the flow of credit with EFFECT economy at large. respect to a specific sector in the economy The effect is on the cost of credit and The effect is on the eligibility for availability or quantum of credit credit of a debtor EXAMPLE Bank Rate Policy, variable reserve Directives and Informal Methods requirement, open market operations policy, statutory liquidity operations Table 9.1: Difference Between General Methods of Control and Selective Methods of Control 9.4 METHODS OF CREDIT CONTROL 1. REFINANCING POLICY The Reserve Bank of India is the lender of last resort for any bank and the Reserve Bank of India regulates the credit it gives to banks through refinancing policies. Refinancing can be done in two ways: (i) By changing the cost of borrowing, i.e., the bank rate (ii) By changing the quantum of borrowing, i.e., the availability of credit to the banks. Bank rate of interest refers to the standard rate at which the Reserve Bank of India is prepared to buy or rediscount bills of exchange or other commercial paper eligible for purchase under this Act. However, since rediscounting was inoperative for a very long time, the Reserve Bank treated the bank rate as the rate of interest charged on the advances and loans given to bank. Therefore, Bank rate of interest in the present context, refers the rate of interest at which the Reserve Bank of India lends money to commercial banks. 159 CU IDOL SELF LEARNING MATERIAL (SLM)
A change in the bank rate would affect the cost of credit for commercial banks. It directly affects the rate at which the commercial banks lend money to their borrowers. That is, the more the bank rate, the more the interest rate charged by the commercial banks to its borrowers. The bank rate of interest is of highest importance in the money market as it is the benchmark or standard guideline to decide on the prevailing rate of interest on money. The Bank Rate of interest therefore decides the money market and the availability of credit in the market. Bank Rate Policy is when the Reserve Bank of India alters the Bank Rate to alter the quantitatively control the availability of credit. If the RBI wants to increase availability of credit, it will decrease the bank rate and if it wants to decrease availability, it will increase the bank rate. The Bank Rate is increased with a view that it would prove to be anti-inflationary as the business would not be able to hold their stocks for long owing to increase in costs. However, this does not serve the purpose at all times. On the contrary, it increases cost of production for genuine buyers and they are forced to increase the price of their products. Another mode of control under refinancing is regulation with respect to rediscounting or lending policy. The Reserve Bank of India has the power to lend money to commercial banks by rediscounting eligible bills on production of security and can frame policies governing such advances. At present the RBI executes these loans in two modes: (a) Refinance for export credit The RBI provides for credit on the export credit already extended, with a view to boost exports. The availability of this credit is dependent on the performance of the bank in this area and at a reasonable rate of interest. (b) Liquidity Adjustment Facility In case of surplus in the money market, the RBI withdraws money from the money market and provides for banks which are facing temporary shortage of funds. This is called Liquidity Adjustment Facility. This finding is provided for the banks to meet their day-to-day expenses only and not for the purpose of their lending. That is, the money obtained underLquidity Adjustment Facility cannot be lent to customers by the bank. 160 CU IDOL SELF LEARNING MATERIAL (SLM)
Under the Liquidity Adjustment Facility, the RBI purchases securities from a commercial bank and the borrowing bank undertakes to repurchase the same at a pre-determined higher price within a specified period. The difference in the two prices amounts to the interest. The purchase made by the RBI is called a Repo transaction and the price at which RBI makes the purchase is the Repo Rate. The repurchase made by the borrowing bank is the Reverse Repo transaction and the rate at which the repurchase is made is the Reverse Repo Rate. The Repo Rate and Reverse Repo Rate will be decided by the RBI. 2. CASH RESERVE REQUIREMENT Every scheduled bank India must maintain a Cash Reserve with the RBI under section 42 of the Reserve Bank of India Act, 1934 and has also issued the following Directives: - (a) Only scheduled banks are liable to maintain a Cash Reserve and not non-scheduled bank. (b) The amount of Cash Reserve would be a percentage of the total demand and time liabilities of a commercial bank in India. The said percentage would be decided by the RBI from time to time and notified in the Official Gazette. (c) The bank must maintain an average daily balance of the said percentage. Average daily balance refers to the average of the daily balances of a fortnight. (d) The Cash Reserve Requirement of a bank is calculated on the basis of the bank’s demand and time liabilities as on the last Friday of the second preceding fortnight. (e) The banks are liable to maintain at least 70% of the aforesaid amount on a daily basis during the fortnight and the remaining amount may be set right at any time during the fortnight. (f) Liabilities to the banking systems in India, Credit balances in ACU Accounts, Demand and time liabilities in respect of offshore banking units are exempted from liabilities for the purpose of calculating Cash Reserve Requirement. There is no interest of the Cash Reserve maintained. In case of default in maintaining the Cash Reserve, the bank is liable to pay penal interest at the rate prescribed by the RBI. 3. STATUTORY LIQUIDITY REQUIREMENT Section 24 of the Banking Regulation Act, 1949 provides for the maintenance of liquid assets by the commercial banks valuing a percentage of the total demand and time liabilities as on the last Friday of the preceding fortnight, apart from the Cash Reserve Requirement for the 161 CU IDOL SELF LEARNING MATERIAL (SLM)
Scheduled Banks under section 42 of Reserve Bank of India Act, 1934 and the reserve to be maintained under section 18 of Banking Regulation Act, 1949. The maximum percentage to be maintained shall be 40%. Section 24 provides for the following elements with respect to the reserve: (a) Every bank must maintain this reserve in addition to the Cash Reserve Requirement for a scheduled bank and the reserve under section 18 of Banking Regulation Act, 1949 for a non-scheduled bank. (b) The assets to be maintained are to be specified by the Reserve Bank of India (c) The assets to be maintained shall be valuing a certain percentage of the total demand and time liabilities as on the last Friday of the preceding fortnight and the percentage shall be determined by the Reserve Bank of India, subject to a maximum of 40%. (d) The Reserve Bank of India shall determine the manner in which the assets are to be maintained. 4. DIRECTIVES The Reserve Bank of India has the power to issue directives regulating the policies of banking companies with respect to advancing of loans. The directives may be with respect to any of the following issues: - (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 to any company, firm, individual, etc. (d) The rate of Interest and other terms and conditions for a loan advanced. 5. MORAL SUASION The Reserve Bank of India also resorts to informal methods of control by arranging meetings with chief executives and conducts discussions with them and by sending circulars and notifications and making them understand the intent of their control and constrains and why they have to respect the limits and regulations. 6. OPEN MARKET OPERATIONS The Reserve Bank of India purchases or sells Government securities, thereby reducing or increasing cash resources of the commercial banks. Open market operations provide for seasonal finance for commercial banks. During the slack season, the commercial banks 162 CU IDOL SELF LEARNING MATERIAL (SLM)
invest their surplus funds in Government securities and during the busy season, they sell their Government Securities. 9.5 SECURITY AND RECOSNTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002 (SARFESI ACT) The SARFESI Act, 2002 aims at regulating companies dealing in debts and financial assets and to protect secured creditors and their rights. 9.6 REGISTRATION UNDER SARFESI ACT Section 3 of the SARFESI ACT provides for who can undertake the business of securitisation and reconstruction of financial assets and the rules for registration of such business. The company must have a minimum of 2 crores of own funds. The Reserve Bank of India shall issue a certificate of registration after verifying whether all the conditions mentioned in section 3(3) are fulfilled. Section 3(3) reads as follows: - (3) The Reserve Bank may, for the purpose of considering the application for registration of an asset reconstruction company] to commence or carry on the business of securitisation or asset reconstruction, as the case may be, require to be satisfied, by an inspection of records or books of such asset reconstruction company, or otherwise, that the following conditions are fulfilled, namely: -- 1. that the asset reconstruction company has not incurred losses in any of the three preceding financial years. 2. that such asset reconstruction company has made adequate arrangements for realisation of the financial assets acquired for the purpose of securitisation or asset reconstruction and shall be able to pay periodical returns and redeem on respective due dates on the investments made in the company by the qualified buyers or other persons. 3. that the directors of securitisation company or reconstruction company have adequate professional experience in matters related to finance, securitisation, and reconstruction. (i) That any of its directors has not been convicted of any offence involving moral turpitude. 163 CU IDOL SELF LEARNING MATERIAL (SLM)
(ii) That a sponsor of an asset reconstruction company is a fit and proper person in accordance with the criteria as may be specified in the guidelines issued by the Reserve Bank for such persons. (iii) That asset reconstruction company has complied with or is in a position to comply with prudential norms specified by the Reserve Bank. (iv)That asset reconstruction company has complied with one or more conditions specified in the guidelines issued by the Reserve Bank for the said purpose. Section 4 deals with the cancellation of a certificate of registration and reads as follows: Section 4: Cancellation of Registration (1) The Reserve Bank may cancel a certificate of registration granted to an asset reconstruction company, if such company-- (a) ceases to carry on the business of securitisation or asset reconstruction; or (b) ceases to receive or hold any investment from a qualified institutional buyer; or (c) has failed to comply with any conditions subject to which the certificate of registration has been granted to it; or (d) at any time fails to fulfil any of the conditions referred to in clauses (a) to (g) of sub- section (3) of section 3; or (e) fails to— (i) comply with any direction issued by the Reserve Bank under the provisions of this Act; or (ii) maintain accounts in accordance with the requirements of any law or any direction or order issued by the Reserve Bank under the provisions of this Act; or (iii)submit or offer for inspection its books of account or other relevant documents when so demanded by the Reserve Bank; or (iv) obtain prior approval of the Reserve Bank required under sub-section (5) of section 3: Provided that before cancelling a certificate of registration on the ground that the asset reconstruction company has failed to comply with the provisions of clause (c) or has failed to fulfill any of the conditions referred to in clause (d) or sub-clause (iv) of clause (e), the Reserve Bank, unless it is of the opinion that the delay in cancelling the certificate of registration granted under sub-section (4) of section 3 shall be prejudicial to the public 164 CU IDOL SELF LEARNING MATERIAL (SLM)
interest or the interests of the investors or the securitisation company or the reconstruction company, shall give an opportunity to such company on such terms as the Reserve Bank may specify for taking necessary steps to comply with such provisions or fulfilment of such conditions. (2) An asset reconstruction company aggrieved by the order of [***] or cancellation of certificate of registration may prefer an appeal, within a period of thirty days from the date on which such order of cancellation is communicated to it, to the Central Government: Provided that before rejecting an appeal, such company shall be given a reasonable opportunity of being heard. (3) An asset reconstruction company, which is holding investments of qualified institutional buyers and whose application for grant of certificate of registration has been rejected or certificate of registration has been cancelled shall, notwithstanding such rejection or cancellation, be deemed to be a securitisation company or reconstruction company until it repays the entire investments held by it (together with interest, if any) within such period as the Reserve Bank may direct. Section 4(1) provides for the circumstances under which a Certificate of registration may be cancelled. A certificate of registration can be cancelled if the company in question: (a) Ceases to carry on business of securitisation or asset reconstruction (b) Ceases to receive or hold any investment from a qualified buyer. (c) Does not comply with the directions issued by the RBI (d) Does not maintain accounts as directed by the RBI (e) Does not submit the books of accounts or any other relevant document for inspection (f) Does not get prior approval from RBI for change of address of registered office or substantial change in management. Before giving an Order of Cancellation, the RBI shall give an opportunity for the company to take necessary steps for rectification, if the proceedings are under (c) or (d). 9.7 SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS. 165 CU IDOL SELF LEARNING MATERIAL (SLM)
Section 2(z): Securitisation: \"securitisation\" means acquisition of financial assets by any securitisation company or reconstruction company from any originator, whether by raising of funds by such securitisation company or reconstruction company from qualified institutional buyers by issue of security receipts representing undivided interest in such financial assets or otherwise. The essentials of securitisation are: (a) Financial assets must be acquired. (b) They must be acquired either by an originator or securitisation company or reconstruction company. (c) They May be acquired by raising funds from qualified institutional buyers by issuing security receipts representing undivided interest in such financial assets or otherwise. Section 2(I): Financial Assets: \"financial asset\" means debt or receivables and includes-- (i) a claim to any debt or receivables or pan thereof, whether secured or unsecured; or (ii) any debt or receivables secured by, mortgage of, or charge on, immovable property; or (iii) a mortgage, charge, hypothecation or pledge of movable property; or (iv) any right or interest in the security, whether fall or part underlying such debt or receivables; or (v) any beneficial interest in property, whether movable or immovable, or in such debt, receivables, whether such interest is existing, future, accruing, conditional or contingent; or (va) any beneficial right, title or interest in any tangible asset given on hire or financial lease or conditional sale or under any other contract which secures the obligation to pay any unpaid portion of the purchase price of such asset or an obligation incurred, or credit otherwise provided to enable the borrower to acquire such tangible asset; or (vb) any right, title or interest on any intangible asset or licence or assignment of such intangible asset, which secures the obligation to pay any unpaid portion of the purchase price 166 CU IDOL SELF LEARNING MATERIAL (SLM)
of such intangible asset or an obligation incurred, or credit otherwise extended to enable the borrower to acquire such intangible asset or obtain licence of the intangible asset; or. (vi) any financial assistance. The definition itself starts by saying that a financial asset is any debt or receivable. Further, since the word ‘includes’ is used, financial assets are not limited to the assets listed in the aforesaid definition. Section 5 talks about acquisition of financial assets. The securitisation company or reconstruction company may acquire the financial assets of any bank or financial institution and may issue debentures or bonds with mutually agreed terms for consideration thereof. Alternatively, the company may enter into an agreement with the bank or financial institution for the transfer of financial assets on mutually agreed terms and conditions. On the acquisition of such assets, the company shall be deemed as the lender and shall acquire the legal status of the lender with all attached rights and obligations. After acquisition, the borrower shall be given notice of the transfer by the bank or financial institution. On receipt of such notice, the borrower shall be made liable to pay the company. In case the borrower clears the debt and pays it to the bank or financial institution, the bank or financial institution shall hold the money on trust and on behalf of the company. Section 7 deals with rising funds from qualified institutional buyers using the acquired financial assets. The securitisation company can raise funds by offering security receipts to qualified institutional buyers for subscription. An asset reconstruction company can formulate schemes to acquire these financial assets from the qualified institutional buyers. However, the company must maintain a separate account with respect to the scheme and acquired asset. The scheme may be in the nature of a trust to be managed by the securitisation or reconstruction company. Such company shall hold the assets so acquired or the funds so raised for acquiring the assets, for the benefit of the qualified institutional investors who hold the security receipts or from whom funds are raised. In case the assets are not realised in that 167 CU IDOL SELF LEARNING MATERIAL (SLM)
manner, the holder of not less than 75% of the total value of the security receipts shall hold a meeting with the buyers and pass a resolution, which shall be binding on the company. Section 9 provides for the measures of reconstruction, which are as follows: - (a) The proper management of the business of the borrower, by change in, or take-over of, the management of the business of the borrower. (b) The sale or lease of a part or whole of the business of the borrower. (c) Rescheduling of payment of debts payable by the borrower. (d) Enforcement of security interest in accordance with the provisions of this Act. (e) Settlement of dues payable by the borrower. (f) Taking possession of secured assets in accordance with the provisions of this Act. (g) Conversion of any portion of debt into shares of a borrower company. A securitisation or reconstruction company can also do the following acts:- (i) Act as an agent of the bank or financial institution for the purpose of recovery of dues. (ii) Act as a manager of the assets acquired (iii)Act as a receiver when appointed by any Court/Tribunal. Section 12 says that the RBI has the power to determine policies for regulation of securitisation or reconstruction companies and give directions with respect to income recognition, accounting standards, provisions for bad and doubtful debts, capital currency and deployment of funds. The RBI even has the power to specify financial assets that can be acquired and the procedure for their acquisition and the value of the financial assets so acquired. Violation of the directions of the RBI is punishable with a fine up to Rupees Five Lakh and Rupees Ten Thousand per day for every day of continuing the offence. 9.8 BANKING REGULATIONS ACT, 1949 Banking Regulations Act, 1949 is a law that governs and regulates the banking business in India. It defines the businesses a bank can do and cannot and also regulates how much credit a bank should give and to whom. Banking Regulations Act, 1949 also regulates how much capital a bank should maintain and how a bank should manage its finances. This Act was passed in the year 1949 on recognising the need to regulate the banking business in India as the Indian Companies Act, 1913 proved to be inadequate. Banks faced 168 CU IDOL SELF LEARNING MATERIAL (SLM)
issued and failed due to inadequacy of capital. Therefore, this Act brought in a certain minimum capital requirement for banks. This Act also aimed at regulating the licensing for opening new branches and preventing the opening of unnecessary random branches by banks. This Act also intended to remove the element of competition among banks. This Act gave powers to the RBI to appoint, reappoint and remove the chairman and officers of banks so that that the management of all banks would come under the supervision of the RBI. This Act aims at protecting the depositors and public at large by regulating credit given by the banks. The Act restricts foreign banks from investing funds of Indian depositors outside India and aims at providing quick and easy liquidation of banks when they are unable to continue operations or amalgamate with other banks. Under this Act, weaker banks must amalgamate with senior banks compulsorily. The salient features of the Banking Regulation Act, 1949 are: The Act prevents banks from directly or indirectly deal with buying or selling or bartering of goods. However, bartering of Negotiable Instruments for the purpose of collection is permitted. Bank is prohibited from holding any immovable property for more than seven years. The Act also regulates the composition of the Board of Directors in a bank and their qualifications. The Act mandates that every bank must maintain a minimum amount of money as capital. The Act regulates the amount of brokerage, commission, discount or remuneration on issue of shares. The Act also says that the bank shall pay any dividend on its shares only after all its capital expenses, including organisational expenses, share selling commission, brokerage losses, etc. are written off. 9.9 RESERVE BANK OF INDIA ACT, 1934 169 CU IDOL SELF LEARNING MATERIAL (SLM)
The Reserve Bank of India was established under this Act and the objectives of the Act read as follows: “to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.” The RBI was established with a view of regulating financial policies and to develop banking facilities. The most important and main responsibility of the RBI is to maintain financial stability and credit. The fundamental object of the Reserve Bank of India is to discharge purely central banking functions in the Indian money market, i.e., to act as the note- issuing authority, bankers’ bank and banker to government, and to promote the growth of the economy within the framework of the general economic policy of the Government, consistent with the need of maintenance of price stability. The functions of the RBI are as follows: As per the RBI Act 1934 it performs 3 types of functions as that of any other central bank. They are, 1. Banking Functions 2. Supervisory Functions and 3. Promotional Functions. The main functions of the RBI are to regulate the money supply in the country. Moreover, it has been directed to take care of agriculture, industry, export promotion etc. The RBI is also responsible for the maintenance of external value of rupee. 1. Banking Functions: 1. Bank of Issue: Under section 22 of the Reserve Bank of India Act, the bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those other Banking Department. 170 CU IDOL SELF LEARNING MATERIAL (SLM)
Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of the assets might be held in rupees coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India. Due to the exigencies of the Second World War and the post-war period, these provisions were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Rs. 200 crores, of which at least Rs. 115 crores should be in gold. The system as it exists today is known,-as the minimum reserve system. 2. Banker to Government: The second important function of the Reserve Bank of India is to act as Government banker, agent and adviser. The Reserve Bank is agent of Central Government and of all State Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has the obligation to transact Government business, via to keep the cash balances as deposits free of interest, to receive and to make payments on behalf of the Government and to carry out their exchange remittances and other banking operations. The Reserve Bank of India helps the Government–both the Union and the States to float new loans and to manage public debt. The Bank makes ways and means advances to the Governments for 90 days. It makes loans and advances to the States and local authorities. It acts as adviser to the Government on all monetary and banking matters. 3. Bankers’ Bank and Lender of the Last Resort: The Reserve Bank of India acts as the banker’s bank. According to the provisions of the Banking Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilities and 2 percent of its time liabilities in India. 171 CU IDOL SELF LEARNING MATERIAL (SLM)
By an amendment of 1962, the distinction between demand and time liabilities was abolished and banks have been asked to keep cash reserves equal to 3 percent of their aggregate deposit liabilities. The minimum cash requirements can be changed by the Reserve Bank of India. The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible securities or get financial accommodation in times of need or stringency by rediscounting bills of exchange. Since commercial banks can always expect the Reserve Bank of India to come to their help in times of banking crisis the Reserve Bank becomes not only the banker’s bank but also the lender of the last resort. 4. Controller of Credit: The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume of credit created by banks in India. It can do so through changing the Bank rate or through open market operations. According to the Banking Regulation Act of 1949, the Reserve Bank of India can ask any particular bank or the whole banking system not to lend to particular groups or persons on the basis of certain types of securities. Since 1956, selective controls of credit are increasingly being used by the Reserve Bank. The Reserve Bank of India is armed with many more powers to control the Indian money market. Every bank has to get licence from the Reserve Bank of India to do banking business within India. The licence can be cancelled by the Reserve Bank if certain stipulated conditions are not fulfilled. Every bank will have to get the permission of the Reserve Bank before it can open a new branch. Each scheduled bank must send a weekly return to the Reserve Bank showing in detail, its assets and liabilities. This power of the Reserve Bank to call for information is also intended to give it effective control of the credit system. The Reserve Bank has also the power to inspect the accounts of any commercial bank. As supreme banking authority in the country, the Reserve Bank of India, therefore, has the following powers: 172 CU IDOL SELF LEARNING MATERIAL (SLM)
1. It holds the cash reserves of all the scheduled banks. 2. It controls the credit operations of banks through quantitative and qualitative control. 3. It controls the banking system through the system of licensing, inspection and calling for information. 4. It acts as the lender of the last resort by providing re-discount facilities to scheduled banks. 5. Custodian of Foreign Reserve: It is the responsibility of the Reserve bank to stabilize the external value of the national currency. The Reserve Bank keeps golds and foreign currencies as reserves against note issue and also meets adverse balance of payments with other counties. It also manages foreign currency in accordance with the controls imposed by the government. As far as the external sector is concerned, the task of the RBI has the following dimensions: To administer the foreign Exchange Control; To choose ,the exchange rate system and fix or manages the exchange rate between the rupee and other currencies; To manage exchange reserves; To interact or negotiate with the monetary authorities of the Sterling Area, Asian Clearing Union, and other countries, and with International financial institutions such as the IMF, World Bank, and Asian Development Bank. The RBI is the custodian of the country’s foreign exchange reserves, id it is vested with the responsibility of managing the investment and utilization of the reserves in the most advantageous manner. The RBI achieves this through buying and selling of foreign exchange market, from and to schedule banks, which, are the authorized dealers in the Indian foreign exchange market. The Bank manages the investment of reserves in gold counts abroad and the shares and securities issued by foreign governments and international banks or financial institutions. 2. Supervisory Functions 173 CU IDOL SELF LEARNING MATERIAL (SLM)
In addition to its traditional central banking functions, the Reserve Bank has certain non- monetary functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers of supervision and control over commercial and co-operative banks, relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction and liquidation. The RBI is authorized to carry out periodical inspection of the banks and to call for returns and necessary information from them. The nationalization of 14 major Indian scheduled banks in July 1969 has imposed new responsibilities on the RBI for directing the growth of banking and credit policies towards more rapid development of the economy and realization of certain desired social objectives. The supervisory functions of the RBI have helped a great deal in improving the standard of banking in India to develop on sound lines and to improve the methods of their operation. 3. Promotional Functions With economic growth assuming a new urgency since independence, the range of the Reserve Bank’s functions has steadily widened. The Bank now performs a variety of developmental and promotional functions, which, at one time, were regarded as outside the normal scope of central banking. The Reserve Bank was asked to promote banking habit, extend banking facilities to rural and semi- urban areas, and establish and promote new specialized financing agencies. Accordingly, the Reserve Bank has helped in the setting up of the Industrial Finance Corporation of India and the State Financial Corporations; it set up the Deposit Insurance Corporation in 1962, the Unit Trust of India in 1964, the Industrial Development Bank of India also in 1964, the Agricultural Refinance Corporation of Indian in 1963 and the Industrial Reconstruction Corporation of India in 1972. These institutions were set up directly or indirectly by the Reserve Bank to promote saving habit and to mobilize savings, and to provide industrial finance as well as agricultural 174 CU IDOL SELF LEARNING MATERIAL (SLM)
finance. As far back as 1935, the Reserve Bank of India set up the Agricultural Credit Department to provide agricultural credit. But only since 1951 the Bank’s role in this field has become extremely important. The Bank has developed the co-operative credit movement to encourage saving, to eliminate moneylenders from the villages and to route its short term credit to agriculture. The RBI has set up the Agricultural Refinance and Development Corporation to provide long-term finance to farmers. 9.10 REGULATION OF INSURANCE SECTOR IN INDIA Insurance Regulatory Development Authority regulates the insurance sector in India. Insurance Regulatory Development Authority is governed by the Insurance Regulatory Development Authority Act, 1999. The act provides for the establishment of the Insurance Regulatory Development Authority and for defining its powers and functions. The Insurance Regulatory Development Authority is established to protect the interest and fair treatment of policy holders, ensure that the industry works in a fair and sound manner and there is no ambiguity in the functioning of the insurance sector. In a nutshell, the IRDA is established to supervise and regulate insurance companies in the country. The Insurance Regulatory Development Authority consists of a chairman and not more than five whole-time members and four part-time members. The Central Government shall appoint the chairperson and members. The chairman and the members shall have knowledge in and experience in life insurance, general insurance or actuarial science1. 1 Section 4 of Insurance Regulatory Development Authority Act, 1999 175 CU IDOL SELF LEARNING MATERIAL (SLM)
The functions of the Insurance Regulatory Development Authority are as follows1: Issue certificates of registration for insurance companies Renew registrations for insurance companies Modify Certificates of insurance companies Withdraw Registration of insurance companies Suspend registration of insurance companies Cancel registration of insurance companies Protect the interest of policy holders Regulate assignment of policies Regulate nomination of policies Regulate matters relating to insurable interest, settlement of insurance claims, surrender value of policies, etc. Specify the code of conduct for surveyors and loss assessors Promote efficiency of insurance business Promoting and regulating insurance and re-insurance business Levying fees and other charges for carrying out the purposes of this act. Conducting inspection of insurance companies Conducting enquiries and investigations with respect to insurance companies Conducting audit of insurers, intermediaries and organisations connected with insurance business Control and regulate the rates, advantages, terms and conditions to be offered by the insurers Specify the form and manner in which books of accounts are to be maintained by insurance companies and insurance intermediaries. Regulate investment of funds by insurance companies Regulate maintenance of margin of insolvency Adjudicate disputes between insurance companies and insurance intermediaries. Supervise the functioning of Tariff Advisory Committee. To regulate the percentage of premium income to be used for promoting professional organisations engaged in insurance and re-insurance business. 1 Section 14 of Insurance Regulatory Development Authority Act, 1999 176 CU IDOL SELF LEARNING MATERIAL (SLM)
To specify the percentage of life insurance business and general insurance business to be undertaken in rural sector. Exercise any other powers as may be prescribed. 9.11 FOREIGN EXCHANGE MANAGEMENT ACT, 1999 The Foreign Exchange Management Act, 1999 (FEMA) enables the RBI and the Government to pass regulations and policies with respect to foreign exchange in tune with foreign trade policy in India. This Act replaced Foreign Exchange Regulation Act, 1973 (FERA), which was passed to regulate foreign exchange and securities. FERA did not comply with post liberalisation policies of the Government. The main change that FEMA brought in was that all criminal offences under FERA were made civil under FEMA. The major differences between FERA and FEMA are as follows: Foreign Exchange Regulation Act Foreign Exchange Management Act (FEMA) (FERA) FERA was conceived with the notion FEMA was conceived with the notion that Foreign that Foreign Exchange is a scarce Exchange is an asset. resource. FERA rules regulated foreign FEMA focused on increasing the foreign exchange payments. reserves of India, focused on promoting foreign payments and foreign trade. The objective of FERA was The objective of FEMA is Management of conservation of Foreign Exchange Foreign Exchange The definition of “Authorized Person” The definition of “Authorized Person” was was narrow. widened Banking units did not come under the Banking units came under the definition of 177 CU IDOL SELF LEARNING MATERIAL (SLM)
definition of Authorized Person. Authorized Person. If there was a violation of FERA rules, If there was a violation of FEMA rules, then it is then it was considered as Criminal considered as civil offence offence. A person accused of FERA violation A person accused of FEMA violation will be was not provided legal help. provided legal help. There was no provision for Tribunal, There is provision for Special Director (Appeals) the appeals were sent to High Courts and Special Tribunal For those guilty of violating FERA For those guilty of violating FEMA rules, they rules, there was provision for direct have to pay a fine, starting from the date of punishment. conviction, if the penalty is not paid within 90 days, then the guilty will be imprisoned. If there was a need for transferring of For External trade and remittances, there is no funds for external operations, then prior need for prior approval from the Reserve Bank of approval of the Reserve Bank of India India (RBI). (RBI) is required. There was no provision for IT There is provision for IT The main features of FEMA are as follows:- i. It gives the Central Government power to regulate flow of payments to and from people situated outside the country ii. It mandates that all transactions pertaining to foreign exchange or securities are to be done only through authorised persons as defined under this Act. iii. It gives the Government power to restrict an authorised individual from carrying out foreign exchange dealings within the current account iv. It empowers the RBI to restrict transactions on capital even by authorised persons. 178 CU IDOL SELF LEARNING MATERIAL (SLM)
v. Indians residing in India have a right to conduct foreign exchange, foreign security transactions and hold or own immovable properties outside India if they were acquired when they were based outside India or if they inherited the property from someone staying outside India. 9.12 SUMMARY One of the main functions of the Reserve Bank of India is to control or regulate the credit given by the banks. This control is exercised only to make sure the banks do not generate excessive credit. Credit Control methods can be classified into two categories, namely quantitative and qualitative, which are also called General and Selective. General or Quantitative control, as the name suggests regulates the amount of credit given. Qualitative Control refers to the eligibility of the person availing credit and how a bank should assess an application for loan and the eligibility of an applicant. The SARFESI Act, 2002 aims at regulating companies dealing in debts and financial assets and to protect secured creditors and their rights. The essentials of securitisation are: Financial assets must be acquired. They must be acquired either by an originator or securitisation company or reconstruction company. They May be acquired by raising funds from qualified institutional buyers by issuing security receipts representing undivided interest in such financial assets or otherwise. Section 9 provides for the measures of reconstruction, which are as follows: - The proper management of the business of the borrower, by change in, or take-over of, the management of the business of the borrower. The sale or lease of a part or whole of the business of the borrower. Rescheduling of payment of debts payable by the borrower. Enforcement of security interest in accordance with the provisions of this Act. Settlement of dues payable by the borrower. Taking possession of secured assets in accordance with the provisions of this Act. Conversion of any portion of debt into shares of a borrower company. 179 CU IDOL SELF LEARNING MATERIAL (SLM)
9.13 KEYWORDS Securitisation: \"securitisation\" means acquisition of financial assets by any securitisation company or reconstruction company from any originator, whether by raising of funds by such securitisation company or reconstruction company from qualified institutional buyers by issue of security receipts representing undivided interest in such financial assets or otherwise. Bank Rate of Interest: Bank rate of interest refers to the standard rate at which the Reserve Bank of India is prepared to buy or rediscount bills of exchange or other commercial paper eligible for purchase under this Act 9.14 LEARNING ACIVITIES 1. Make a research study on the SARESI Act its impact. ___________________________________________________________________________ ___________________________________________________________________________ 2. Collect the information on CRR and SLR fixed by the RBI for the past ten years and observe the changes. ___________________________________________________________________________ ___________________________________________________________________________ 9.15 UNIT END QUESTIONS A. Descriptive Questions: Short Questions: 1. Write short notes on Selective Credit Controls 2. Write short notes on Net Liquidity Ratio 3. Write short notes on Open Market Operations 4. Distinguish between CRR and SLR 5. Distinguish between Re-discounting Scheme and Re finance scheme Long Questions: 1. Examine the relationship between money supply and bank credit. What are the various means by which the RBI controls the bank credit to minimise the inflationary effect on the economy? 180 CU IDOL SELF LEARNING MATERIAL (SLM)
2. Describe briefly the main instruments through with the RBI exercises its powers to regulate expansion of bank credit in general and in particular areas of lending 3. What do you understand by the term CRR and SLR? To what extent the instruments of CRR and SLR have been successful in: (a) Curbing flow of bank credit; and (b) Containing inflation 4. What do you understand by Securitisation and Assets Reconstruction Companies? What functions do they perform? 5. What powers have been conferred on the secured creditors under the SARFESI Act to ensure his security interest? Discuss. B. Multiple Choice Questions: 1. Repo rate is the: a. Rate of interest on short term borrowings from reserve bank b. Rate of discount on bills re-discounted with the RBI c. Coupon rate on government securities d. Interest rate on a bank’s short-term lending 2. Cash Reserve requirement is calculated on the basis of a bank’s- a. Total assets b. Total capital funds c. Net demand and time liabilities d. Net profits 3. As regards Statutory Liquidity Requirement, Banking Regulations Act prescribes a. The minimum percentage b. Minimum and maximum percentage c. Only maximum Percentage d. None of these 4. In case of Selective Credit Controls, higher margins are prescribed to: 181 a. Stop Credit b. Augment Credit CU IDOL SELF LEARNING MATERIAL (SLM)
c. Reduce Credit d. Increase cost of credit to the sector concerned 5. Originator is the- a. Borrower who has taken a loan b. Guarantor c. Bank which has lent money d. Other creditor of borrower Answers 1. (b), 2. (c), 3. (a), 4 (c), 5. (a) 9.16 REFERENCES Textbooks: Elements of Mercantile Law by N.D. Kapoor Mercantile Law by Garg Chawla Banking Law and Practice by P.N. Varshney, Reference Books: Legal Aspects of business by Pathak Akhileshwar Legal Aspects of Business by P.K. Pandhi Websites: Manupatra.com 182 CU IDOL SELF LEARNING MATERIAL (SLM)
183 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 10: REGULATION OF INFORMATION Structure 10.0 Learning objectives 10.1 Introduction 10.2 Digital signature and electronic governance 10.3 Secure electronic records and secure electronic signatures 10.4 Electronic signature certificates 10.5 Duties of a subscriber 10.6 The cyber appellate tribunal 10.7 Offences 10.8 Right to Information Act, 2005 10.9 Summary 10.10 Keywords 10.11Learning activites 10.12 Unit end questions 10.13 References 10.0 LEARNING OBJECTIVES After studying this unit, you should be able to: Get an overview of the Information Technology Act, 2000 Describe Digital signatures and their legal position. Describe Electronic Signatures and their legal position Explain the composition and jurisdiction of Cyber Appellate Tribunal State the offences under the Information Technology Act, 2000 10.1 INTRODUCTION In today’s scenario information is one of the most valuable assets. Be it personal data, biometric data or financial data, they prove to be of great value when in the hands of a person 184 CU IDOL SELF LEARNING MATERIAL (SLM)
other than the owner. Information Technology has grown to a high scale and has made the world a global village. In India, Information Technology and digital information is governed by the Information Technology Act, 2000. The Information Technology Act, 2000 aims at recognising digital data and information legally and protecting them against cyber-crimes and cyber terrorism. 10.2 DIGITAL SIGNATURE AND ELECTRONIC GOVERNANCE Section 2(1)(p) defines Digital Signatures as an authentication of any electronic record by a subscriber by means of an electronic method or procedure in accordance with the provision of Section 3. Section 2(1) (ta) defines electronic signature as the means of authentication of any electronic record by a subscriber by means of the electronic techniques specified in the Second Schedule and includes digital signature. Section 3 provides the procedure for the authentication of an electronic record by affixing digital signature. Section 3 says that the authentication must be through asymmetric crypto system and hash function. Asymmetric crypto system is a system of secure key price consisting of a public key, used to verify the digital signature and a private key, used to create the digital signature. A digital signature can be verified using the public key. The private key and public key constitute a pair and are unique to the subscriber. The Process of verification of the Digital Signature is as follows: (i) Sender applies with the Certifying Authority in the prescribed form for digital signature. (ii) On approval by the Certifying Authority, the authority provides a digital certificate along with the private key and public key. (iii) The sender sends a message with a hash function and further encrypts it with his private key. (iv) Recipient uses the public key provided by the sender to decrypt the message. 10.3 SECURE ELECTRONIC RECORDS AND SECURE ELECTRONIC SIGNATURES Section 14 of the Information Technology Act, 2000 states that an electronic record is deemed to be secured if it goes through any security procedure. Section 15 of the Information Technology Act, 2000 states that an electronic signature is said to be secured if the signature 185 CU IDOL SELF LEARNING MATERIAL (SLM)
creation data was under the exclusive control of the signatory at the time of affixing the signature. Further, the signature creation data must have been stored and affixed exclusively in the manner prescribed. Section 16 gives the Central Government the power to prescribe security procedures and practices. 10.4 ELECTRONIC SIGNATURE CERTIFICATES A Subscriber must apply for issuance of an Electronic Signature Certificate with the Certifying Authority along with a fee of Rs. 25,000/-. On receipt of the application, the Certifying Authority will verify if the following three conditions are satisfied: - (a) The Applicant holds the private key corresponding to the public key to be listed in the electronic signature certificate. (b) The private key is capable of creating an electronic signature. (c) The public key to be listed in the certificate should verify the electronic signature by the private key held by the applicant. If they are fulfilled, the Certifying Authority shall issue the Electronic Signature Certificate to the Applicant. If not, the application can be rejected giving reasons and after giving the Applicant an opportunity of being heard. Section 36 of Information Technology Act, 2000 states that the issuanceof an Electronic Signature Certificate, which includes a Digital Signature Certificate indicates the following facts: - (i) It has complied with the Information Technology Act, 2000 and the rules and regulations made there under. (ii) It has published the certificate or made it available for the person relying on it, with the consent of the subscriber. (iii) The subscriber holds the private key. The public key is listed in the certificate, which can be used to verify the electronic signature. (iv)The subscriber’s public key and private key constitute a functioning key pair. (v) The information in the Certificate is correct. (vi) No material fact within its knowledge, which would adversely affect the representations above were suppressed. 186 CU IDOL SELF LEARNING MATERIAL (SLM)
Section 37 provides for suspension of a Digital Signature Certificate and reads as follows: - Section 37 - Suspension of Digital Signature Certificate (1) Subject to the provisions of sub-section (2), the Certifying Authority which has issued a Digital Signature Certificate may suspend such Digital Signature Certificate, -- (a) on receipt of a request to that effect from-- (i) the subscriber listed in the Digital Signature Certificate; or (ii) any person duly authorised to act on behalf of that subscriber. (b) if it is of opinion that the Digital Signature Certificate should be suspended in public interest. (2) A Digital Signature Certificate shall not be suspended for a period exceeding fifteen days unless the subscriber has been given an opportunity of being heard in the matter. (3) On suspension of a Digital Signature Certificate under this section, the Certifying Authority shall communicate the same to the subscriber. Section 38 provides for revocation of Digital Signature Certificate and reads as follows: - Section 38 - Revocation of Digital Signature Certificate vi. A Certifying Authority may revoke a Digital Signature Certificate issued by it-- a. where the subscriber or any other person authorised by him makes a request to that effect; or b. upon the death of the subscriber; or c. upon the dissolution of the firm or winding up of the company where the subscriber is a firm or a company. vii. Subject to the provisions of sub-section (3) and without prejudice to the provisions of sub-section (1), a Certifying Authority may revoke a Digital Signature Certificate which has been issued by it at any time, if it is of opinion that-- a. a material fact represented in the Digital Signature Certificate is false or has been concealed: b. a requirement for issuance of the Digital Signature Certificate was not satisfied. 187 CU IDOL SELF LEARNING MATERIAL (SLM)
c. the Certifying Authority's private key or security system was compromised in a manner materially affecting the Digital Signature Certificate's reliability. (e) the subscriber has been declared insolvent or dead or where a subscriber is a firm or a company, which has been dissolved, wound-up or otherwise ceased to exist. viii. A Digital Signature Certificate shall not be revoked unless the subscriber has been given an opportunity of being heard in the matter. ix. On revocation of a Digital Signature Certificate under this section, the Certifying Authority shall communicate the same to the subscriber. The Certifying Authority must publish a notice of suspension or revocation in the repository or repositories mentioned in the certificate for the purpose of publication of notice. 10.5 DUTIES OF A SUBSCRIBER The subscriber must generate the key pair, consisting of the public and private key by applying the security procedure. A subscriber is deemed to have accepted the digital signature certificate if: a. He publishes or authorises the publication of the certificate to one or more persons or in a repository b. He demonstrates his acceptance by any other means. The subscriber shall have complete control of the private key and must take reasonable care to maintain such control. The subscriber shall not divulge the private key to any unauthorised person. In case the public key gets compromised, the subscriber must communicate it to the Certifying Authority without any delay. The subscriber will be liable till he notifies the Certifying Authority. 10.6 THE CYBER APPELLATE TRIBUNAL The Cyber Appellate Tribunal is a quasi-judicial authority established by the Central Government which decides on Appeals from Orders of the Controller or Adjudicating Officer under this Act. The Cyber Appellate Tribunal shall be the Telecom Dispute Settlement and Appellate Tribunal established under section 14 of Telecom Regulation Authority of India Act, 1997. Appeal to the Cyber Appellate Tribunal 188 CU IDOL SELF LEARNING MATERIAL (SLM)
Any person aggrieved by the Order of the Controller or Adjudicating Officer under this Act may prefer an appeal before the Cyber Appellate Tribunal. However, if the Order was passed with the consent of the parties, no appeal would lie against such Order. The Appeal shall be filed within 45 days from the date of receipt of the copy of the Order. The Appellate Tribunal may condone any delay in filing the appeal if the Appellant gives any reasonable or justifiable cause for the delay. The Tribunal shall hear both the parties and may pass Orders modifying, confirming or setting aside the Order appealed against1. The tribunal shall not be bound by the Code of Civil Procedure and shall have the right to decide its own procedure. The tribunal shall have the powers of a Civil Court with respect to the following matters: - (a) Summoning and enforcing the attendance of any person and examining him on oath. (b) Requiring the discovery and production of documents or other electronic records. (c) Receiving evidence on affidavits. (d) Issuing commissions for the examination of witnesses or documents. (e) Reviewing its decisions. (f) Dismissing an application for default or deciding it ex parte. (g) Any other matter which may be prescribed. 10.7 OFFENCES OFFENCE PUNISHMENT PROVISION Tampering with computer source Documents, Imprisonment up to 3 years Section 65 which includes concealing, destroying or altering or fine up to Rs. 2,00,000/- Section 66 a computer source code, computer programme or or both computer network Computer related offences listed under section Imprisonment up to three 43 of the Act fraudulently and dishonestly years and fine up to Rs. committed 5,00,000/- or both 1Section 57 of Information Technology Act, 2000 189 CU IDOL SELF LEARNING MATERIAL (SLM)
Dishonestly receiving stolen computer resources Imprisonment up to three Section 66B or communication devices with the knowledge years or fine of Rs. 1,00,000/- or both that they are stolen Identity theft, which includes stealing of Imprisonment up to three Section 66C electronic signature, password or any other years and fine up to Rs. Section 66F unique identification feature 1,00,000/- Cyber Terrorism: Imprisonment up to life Cyber terrorism includes: imprisonment (a) Denying or causing denial of access for an authorised person to access a computer resource (b) Attempting to penetrate or access a computer resource (c) Introducing or causing introduction of computer contamination. Cyber terrorism are acts that are likely to endanger life or cause danger to life or property and result in damage or disruption of essential supplies and services Publishing or transmitting obscene material in Imprisonment up to three Section 67 electronic form years and fine up to Rs. 5,00,000/- On subsequent conviction, imprisonment up to five years and fine up to Rs. 10,00,000/- Publishing or transmitting sexually explicit in imprisonment up to five Section 67A electronic form years and fine up to Rs. 190 10,00,000/- and on subsequent conviction, imprisonment up to seven CU IDOL SELF LEARNING MATERIAL (SLM)
Publishing or transmitting material depicting years and fine up to Rs. Section 67B children in sexually explicit acts in the following 10,00,000/- 191 manner: - publishes or transmits or causes to be imprisonment up to five years and fine up to Rs. published or transmitted material in any electronic form which depicts children 10,00,000/- and on engaged in sexually explicit act or conduct; subsequent conviction, or imprisonment up to seven creates text or digital images, collects, seeks, years and fine up to Rs. browses, downloads, advertises, promotes, exchanges, or distributes material in any 10,00,000/- electronic form depicting children in obscene or indecent or sexually explicit manner; or cultivates, entices, or induces children to online relationship with one or more children for and on sexually explicit act or in a manner that may offend a reasonable adult on the computer resource; or facilitates abusing children online, or records in any electronic form own abuse or that of others pertaining to sexually explicit act with children, shall be punished on first conviction with imprisonment of either description for a term which may extend to five years and with fine which may extend to ten lakh rupees and in the event of second or subsequent conviction with imprisonment of either description for a term which may extend to seven years and also with fine which may extend to ten lakh rupees: Provided that provisions of section 67, section 67A and this section does not extend to any book, pamphlet, paper, writing, CU IDOL SELF LEARNING MATERIAL (SLM)
drawing, painting representation or figure in electronic form- the publication of which is proved to be justified as being for the public good on the ground that such book, pamphlet, paper, writing drawing, painting representation or figure is the interest of science, literature, art or learning or other objects of general concern; or which is kept or used for Bonafede heritage or religious purposes. Table 10.1: Table depicting various offences 10.8 LIMITATIONS OF INFORMATION TECHNOLOGY ACT, 2000 The information technology act, 2000 has the following shortcomings: The legislation does not cover spamming or prevent it. Spamming refers to bulk e mails which pose huge threats to privacy and security, apart from being a nuisance and disturbance. The legislation does not cover phishing. Phishing is the attempt to acquire sensitive information such as usernames, passwords, credit card details, etc. It can be done by e mail asking for financial or sensitive information to be entered in a website. The legislation does not address the security issues in internet banking. The issue of identity theft also has not been clearly dealt with in the legislation, though it has been defined under the act. Cyber wars are not covered under the legislation and there is no legal remedy or provision for prevention of the same. The punishments for cyber crimes are not stringent enough to prevent them 192 CU IDOL SELF LEARNING MATERIAL (SLM)
The definition of various crimes contain a lot of loopholes and create escape routes for criminals Issues of privacy and data protection are not given enough attention or emphasis. 10. 9 RIGHT TO INFORMATION ACT, 2005 The Right to Information Act, 2005 was passed after the Hon’ble Supreme Court recognised the Right to Information as a fundamental right in S.P. Gupta vs. President of India. Two movements took place on the basis of this judgement, which are (i) Mazdoor Kisan Shakti Sangathan (was founded in 1987 by Aruna Roy and Nikhil Dey) in Rajasthan launches movement demanding village level Information in 1994 (ii) Civil society group National Campaign for People’s Right to Information (NCPRI) started movement for RTI Act in 1996 After these two movements, the RTI Act was passed. The objectives of the Act are as follows: (a) To empower citizens and keep them informed (b) To promote transparency and accountability in the functioning of the government. (c) To curtail corruption (d) To make sure the government is under the vigilance of the people themselves. The features of the RTI Act are as follows: (a) All citizens possess right to information (b) Information must be provided within 30 days from the date of request in case of a normal request and within 48 hours from the time of request in case of a matter of life or liberty of a person. (c) Every public authority is duty bound to provide information on written request or request by electronic means. Public Authority is defined under section 2(h) as follows: \"Public authority\" means any authority or body or institution of self-government established or constituted— (a) by or under the Constitution. (b) by any other law made by Parliament; 193 CU IDOL SELF LEARNING MATERIAL (SLM)
(c) by any other law made by State Legislature. (d) by notification issued or order made by the appropriate Government, and includes any— (i) body owned, controlled or substantially financed; (ii) non-Government organisation substantially financed, directly or indirectly by funds provided by the appropriate Government; (d) There are certain categories of information which should not be divulged and the act provides for the same under section 8. (e) There are restrictions with respect to third party information (f) Appeal against the Central Information Commission or State Information Commission lies with an officer who is senior in rank 10.10 SUMMARY Section 2(1)(p) defines Digital Signatures as an authentication of any electronic record by a subscriber by means of an electronic method or procedure in accordance with the provision of Section 3. Section 2(1) (ta) defines electronic signature as the means of authentication of any electronic record by a subscriber by means of the electronic techniques specified in the Second Schedule and includes digital signature. Section 3 provides the procedure for the authentication of an electronic record by affixing digital signature. Section 3 says that the authentication must be through asymmetric crypto system and hash function. Asymmetric crypto system is a system of secure key price consisting of a public key, used to verify the digital signature and a private key, used to create the digital signature. A digital signature can be verified using the public key. The private key and public key constitute a pair and are unique to the subscriber. The Process of verification of the Digital Signature is as follows: Sender applies with the Certifying Authority in the prescribed form for digital signature. On approval by the Certifying Authority, the authority provides a digital certificate along with the private key and public key. The sender sends a message with a hash function and further encrypts it with his private key. 194 CU IDOL SELF LEARNING MATERIAL (SLM)
Recipient uses the public key provided by the sender to decrypt the message. 10.11 KEYWORDS Digital Signatures: Digital Signatures are an authentication of any electronic record by a subscriber by means of an electronic method or procedure in accordance with the provision of Section 3. Electronic Signatures: electronic signature as the means of authentication of any electronic record by a subscriber by means of the electronic techniques specified in the Second Schedule and includes digital signature. 10.12 LEARNING ACTIVITES 1. Prepare a research paper on the impact of the IT Act in the Indian Judiciary ___________________________________________________________________________ _____________________________________________________________________ 2. Observe the trial of any offence under the Information Technology Act and prepare a case study. ___________________________________________________________________________ _____________________________________________________________________ 10.13 UNIT END QUESTIONS 195 A. Descriptive Questions: Short Questions: 1. Offences committed by Companies 2. Pornography on the Internet 3. Functions and Powers of Controller 4. Offences committed outside India 5. Unauthorised modification of computer programmes and data Long Questions: 1. Explain the provisions relating to use of electronic records and digital signatures in Government and its agency. Also discuss about legal recognitions of electronic records and digital signatures. 2. Explain provisions relating to making an appeal to Cyber Appellate Tribunal. CU IDOL SELF LEARNING MATERIAL (SLM)
3. Explain the difference between Cyber Contravention and Cyber Offence and list out the Cyber offences under Cognizable/Non-Cognizable and bailable and non bailable categories. 4. Write a detail note on the issue of jurisdiction in computer crimes. 5. Who are called ‘Certifying authorities’ and explain the norms to be followed by these authorities? B. Multiple Choice Questions: 1. Which of the following is not a type of cyber-crime? a. Data theft b. Forgery c. Damage to data and systems d. Installing antivirus for protection 2. Which of the following is not done by cyber criminals? a. Unauthorized account access b. Mass attack using Trojans as botnets c. Email spoofing and spamming d. Report vulnerability in any system 3. What is the punishment in India for stealing computer documents, assets or any software’s source code from any organization, individual, or from any other means? a. 6 months of imprisonment and a fine of Rs. 50,000 b. 1 year of imprisonment and a fine of Rs. 100,000 c. 2 years of imprisonment and a fine of Rs. 250,000 d. 3 years of imprisonment and a fine of Rs. 500,000 4. What is/are component of IT Act 2000? 196 a. Legal Recognition to Digital Signatures b. Regulation of Certification Authorities c. Digital Certificates d. All of these CU IDOL SELF LEARNING MATERIAL (SLM)
5. Controller of Certifying Authorities (CCA) work under? a. Prime Minister office b. Reserve Bank of India c. Ministry of Communication & IT d. autonomous body Answers 1 (d) , 2 (d) , 3 (a) , 4 (b) , 5 (b) 10.14 REFERENCES Textbooks: Elements of Mercantile Law by N.D. Kapoor Mercantile Law by Garg Chawla Law of Information Technology by Vakul Sharma Reference Books: Legal Aspects of business by Pathak Akhileshwar Legal Aspects of Business by P.K. Pandhi Websites: Manupatra.com 197 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 11- LAW OF INSURANCE Structure 11.0 Learning objectives 11.1 Introduction 11.2 Contract of insurance 11.3 Nature of contract 11. 4 Classification of contract of insurance 11.5 Summary 11.6 Keywords 11.7 Learning Activity 11.8 Unit end questions 11.9 References 11.0 LEARNING OBJECTIVES After studying this unit, you should be able to: Explain the concept of insurance State the various kinds of insurance Describe the legal position of an insurer Describe the legal position of an insured Explain the elements of a contract of insurance 11.1 INTRODUCTION Insurance services are also widely and commonly used in today’s world. Insurance is a service that aims at protecting the insured person from a future calamity. In other words, it tries to reduce the effect of the calamity. Insurances are of various types and are made for various purposes. The nature of an insurance contract also depends on its purpose, the calamity, the insurer and the insured. Insurance is governed by various legislations like the Insurance Act, 1938 and Insurance Regulatory and Development Authority Act, 1999. 198 CU IDOL SELF LEARNING MATERIAL (SLM)
11.2 CONTRACT OF INSURANCE A Contract of Insurance is a contract either to indemnify a person against a loss which may arise on the happening of an event or to pay a sum of money on the happening of some or any event for an agreed consideration. Insurer The person who undertakes to indemnify the loss owing to the specified event or events is the insurer or assurer. Insured The person getting indemnified for loss owing to the specified event or events is the insured or assured Premium The consideration paid for the indemnity as periodical payment is premium. Insurance Policy The Document containing the terms and conditions of the insurance is the Insurance Policy. Elements of Insurance (a) The Contract must be between an insurer and insured (b) The Contract must be for the purpose of indemnifying from a loss due to a specific event or series of events. (c) There must be a consideration, which is, premium. (d) An insurance contract must be in writing. Medical Defence Union Ltd. vs. Department of Trade Some medical and dental practitioners formed the ‘Medical Defence Union’ which was to conduct legal proceedings on behalf of its members, indemnifying members against claims for damages and costs and giving advice to members on various matters and provide educational guidance. The members had the right to request for help from the Union. On payment of an appropriate annual subscription. It was held that this contract was not one of insurance as there was no element of indemnity. 199 CU IDOL SELF LEARNING MATERIAL (SLM)
Department of Trade vs. Chrispheres The Defendant company formed an association and announced that if any of its members suffer from any accident they will be provided with a chauffeur or if necessary, a car and a driver. It was held that this amounts to insurance, as the benefit provided need not necessarily be with money. 11.3 NATURE OF CONTRACT (a) CONTRACT IS ‘ALEATORY’ An aleatory contract is one in which the obligation of the parties arise on the happening of a specific event or events, which is uncertain. An insurance contract is one of speculation. The liability of an insurance company arises only on the occurring of a loss or injury owing to the specified event or events. For instance, in case of a fire insurance, the insurance company is liable to pay the insured only in case of loss and injury due to fire. Therefore, insurance is only a gamble and the return for the consideration (premium) paid is not guaranteed. (b) CONTRACT IS OF UTMOST GOOD FAITH A contract of insurance is a contract of utmost good faith. This is because in a contract of insurance, one of the parties is in a privileged position and possesses better knowledge with respect to insurance. Therefore, in a contract of insurance, the insurer is bound to disclose all the material facts and make the insured aware of the same. Marine Insurance Act lays down the rules with respect to disclosure, which apply to all classes of insurance in general. Section 19 clearly says that a contract of marine insurance is a contract of ubberimaefidie Section 20 of the Marine Insurance Act talks about disclosure by the assured and reads as follows: - Section 20 - Disclosure by assured (1) Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which, is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of 200 CU IDOL SELF LEARNING MATERIAL (SLM)
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