The Bill conflicts with the Banking Regulation Act.
The Reserve Bank of India (RBI) has sought exemption from the provisions of the new Company Bill 2008 following its strong conflict with the Banking Regulation Act 1947. Private banks are governed and regulated by RBI under the Banking Regulation Act even as they are registered as companies under the Companies Act before receiving banking licences from the central bank.
According to sources close to the development, the new Company Bill has not made any specific provisions for banks as was the case in the erstwhile Companies Act 1956. Since it will have serious implications for treatment of bank balance sheets, among other things, RBI has asked for the inclusion of a provision like the Section 616 of the Companies Act 1956. To this effect, it has written a letter to the Ministry of Finance explaining the issue.
Section 616 of the Companies Ac 1956 used to accord special exemption to banking companies from the provisions of the Companies Act, which, however, has been dispensed with in the new Bill.
Among the major items which may get affected without a suitable amendment to the Companies Bill is the preparation of bank balance sheets. Sources said that the new Bill would affect balance sheets as it treats bank deposits on a par with company deposits. While deposits are a significant part of bank balance sheets, it may or may not figure in company balance sheets. Secondly, while companies show deposits as borrowing, for banks, they are only deposits.
A similar discrepancy is observed in case of treatment of off-balance sheet items/contingent liabilities — preference shares and payment of dividend, among others. Sources said these items were treated differently by companies and banks and that the conflict of the two regulations would add to confusion for the lenders and their auditors.
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While it is normal for companies to have preference shares, banks usually maintain preference shares in exceptional conditions, and that too with the prior permission of RBI. Derivative items, which are hedging products based on underlying of various financial risks borne by banks — interest rate, exchange rate etc — are quite sizeable for the banks. These appear sometimes as off-balance sheet or on-balance sheet if they are marked to market for losses. “Mark to market”, or MTM, is a method adopted for putting a valuation to the portfolio on a current date at the prevailing market rate. While the gain is notional, the losses are provided for.
Corporate debt restructuring is unique to banks and not to companies, and hence it is a part of the Banking Regulation Act and not the Company Bill. Since there is no provision for CDR in the Company Bill, banks/creditors will only have the option to approach the debt recovery tribunal, which will then decide the mode of restructuring in case of loan defaults. CDR is a mechanism put forth under the guidance of RBI in consultation with various banks to negotiate restructuring of dues of companies in case of defaults.
For the banking sector, another major flaw in the new Bill is the exclusion of government nominees from the category and definition of independent director. While the old companies Act provided for independent director, the definition was as per the clause 49 of listing agreement of the Securities and Exchange Board of India. Sources said it would affect not only private sector banks, but also public sector lenders which are not governed by the Companies Act. This was because, even if they had their own statute, the definition of independent director would be applicable to them as well, they explained.