Treatment of Minimum Capital and Reserves | Banking Companies

Section 11 lays down the following minimum limit of paid up capital and reserves: 

(a) Banking Companies Incorporated Outside India: 

If it has a place of business in Mumbai or Kolkata or both …………… Rs. 20 lakhs

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If it does not have a place of business in Mumbai or Kolkata …………… Rs. 15 lakhs

Further, every year 20% of the profits earned in India must be added to the sums specified above.

The sum must be kept deposited with the Reserve Bank either in cash or in the form of unencumbered approved securities.

(b) Banking Companies Incorporated in India:

(i) If the places of business are in more than one state and if any place of business is in Mumbai or Kolkata Rs. 10 lakhs

(ii) If the places of business are in more than one State but none of the places of business is in Mumbai or Kolkata Rs. 5 lakhs

(iii) If the places of business are only in one State, none of the places of business being in

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Mumbai or Kolkata …………. Rs. 1 lakh for principal places plus Rs. 10,000 for each additional place of business in the same district and Rs. 25,000 for a place of business outside the district.

The total need not exceed Rs. 5 lakhs or Rs. 50,000 in case there is only one place of business. (But companies which commence business after the commencement of the Banking Companies Amendment Act of 1962, a minimum of Rs. 5 lakhs is required.)

(iv) If the places of business are only in one State and if the places of business are also in Mumbai or Kolkata …………… Rs. 5 lakhs plus Rs. 25,000 for each place of business situated outside Mumbai or Kolkata. The total need not exceed Rs. 10 lakhs.

Banking companies carrying on business in India must see to it that:

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(a) The subscribed capital is not less than half the authorised capital;

(b) The paid up capital is not less than half the subscribed capital; and

(c) The capital of the company consists only of ordinary or equity shares and such preference shares as may have been issued before 1st July, 1944.

A shareholder cannot exercise more than one per cent of the total voting rights of the company. A chairman, managing director or chief executive of a banking company must declare his full holdings in the capital of the company. Underwriting commission or brokerage or discount on shares issued by a banking company cannot exceed 2½% of the paid up value of the shares. A charge on unpaid capital cannot be created. No dividend can be declared unless expenses not represented by tangible assets, have been completely written off.

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Reserve Fund (Statutory Reserve):

According to Section 17, “Every banking company incorporated in India shall create a reserve fund and shall, out of the balance of profit and loss account prepared under Section 29 and before any dividend is declared, transfer to the reserve fund a sum equivalent to not less than twenty per cent of such profit.”

Cash Reserve Ratio:

Banks are statutorily required to maintain a certain percentage of demand and time liabilities with RBI. With effect from 1st June, 2002, all banks have been required to keep 5% of their net time and demand liabilities in the form of cash and/or current account balance with the RBI. This percentage varies from time to time with changes in monetary policy.

Statutory Liquidity Ratio (SLR):

In addition to CRR, banks are expected to maintain 25%, with effect from 22nd October, 1997, of their net demand and time liabilities in the form of cash, gold and unencumbered approved securities. (This percentage was previously as high as 37.5. Non-compliance is penalised with the current applicable penalty rates for the shortfall with 3% over the “bank rate” – the rate at which the RBI lends to commercial banks. Under the Banking Regulation Act, SLR may vary between 25 and 40%.

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