Banks & New Companies Act

Reserve Bank of India is the Guard of our Economy system in so far as the banks are concerned. Literally the RBI is guard by a naked woman !! That is the statues of Yaksha and Yakshini, the mythical guards of wealth in front of its RBI offices. The object of erecting the statue of a naked woman (Yakshini) at the gates of the central bank is to symbolise of RBI’s role as the guardian of the nation’s wealth. Rather the bank nationalisation proved that a strong regulator was necessary to keep the financial system from losing its clothes.

This two statutes at the RBI offices have mythological significance. They are yakshas which are a class of spirit beings or semi divine beings who are mentioned in Hindu, Buddhist and Jain literature as inhabitants of the
subterranean earth and protectors of treasures. Basically a tribe of yakshas, known for their wealth and valor,  seemed to have ruled some region in the foothills of the Himalayas, which was probably visited by the Pandavas during
their sojourns into the north. Both are divine. Their female counterparts, known as the yakshinis are known for their beauty and charm and While the male yakshas are depicted in Hindu art and architecture as portly and deformed, the
yakshis or Yakshinis are depicted as women of great charm and beauty. The yakshas and yakshinis were in the epics,  the Puranas and in the works of Kalidasa. They are often described as two types of yakshas, benevolent and
malevolent. The Yakshas are described in Hindu literature as the brothers of demonic beings (rakshasas), who live further down below the earth in the subterranean planes. That is the reason why they are kept in RBI office.

Now the New Companies Bill does away with as many as 175 old sections. Rather , in the process of simplification, it  has done away with a key section that gave banking companies a special status, bringing them under the Banking
Regulations Act of 1949 and thus under the regulatory purview of RBI. But the new bill treats a bank as any other company. It may not be suitable if this law is passed without inserting a clause similar to section 616 of the old Companies Act, it could end up undermining the regulatory powers of companies, create confusion in the way bank  balance sheets are written and throw away some of the prudential norms imposed exclusively on banks by RBI and different technical committee.There may be many similarities between a company and a bank but there are also many differences. It starts from balance sheets to operations which are the things that can’t do work like a company would do.

All the nationalised Banks need a higher level of protection against failure than companies, because they work with the savings of millions of poor people. Particularly a bank failure is an extremely serious affair, the reason why RBI normally moves at lightning speed to merge failing banks with healthy ones. As per law the Banks are not allowed to invest in real estate for profit. They cannot hold property for more than seven years except for own use. Also the banks can’t lend against their own shares, lend to firms associated with directors, create floating charge on their assets without regulatory permission or wind up their operations voluntarily.

In fact all restrictions not applied to corporate entities. It will be critical if banks are clubbed with the companies the transparency experienced under the regime of RBI may not be available as the banks then may not be subject to such strict scrutiny and norms. Rather it would probably lead to multiple regulators governing banks with distinct policies all aimed at the sole objective of profit maximization rather than social good and cause. The Banks primarily are registered as companies as far as their obligations to shareholders are concerned.

As of date the Companies Act and stock market regulations by the Securities and Exchange Board of India (SEBI) already have the necessary supervisory powers over banks. The RBI is to govern the banking system thoroughly. The Union government must bring back the exemption to the banks. The accounts in the banking laws should be allowed to be followed the IFRS. Also the Act may be changed to use the advent of the International Financial Reporting Standards (IFRS) to narrow accounting differences between companies and banks. With this the purpose of the New Companies Bill the regulation will be easy to follow and administer would be definitely realized.