Government of India Volume I: Analysis and Recommendations

ANNEXES
3. On the issue of co-operatives which collect monies from members/ shareholders,
this WG recommends that any co-operative society accepting deposits exceeding
a specified value must fall within the regulatory purview of the banking regulator.
Co-operative banks are currently regulated under Part V of the Banking Regulation
Act, 1949 (BR Act), but many provisions in the BR Act are not applicable to them.
This WG recommends that such exclusions be removed. Co-operative banks must
be treated at par with banking companies. This WG also endorses the policy recommendations
of the Malegam Report on Urban Co-operative Banks (2011). To
deal with the problem of dual control, the Committee recommends the creation
of a new organisation structure for Urban Cooperative Banks (UCBs) consisting of
a board of management in addition to the board of directors. The board of directors
would be elected in accordance with the provisions of the respective State Cooperative
Societies Acts or the Multi-State Co-operative Act, 2002 and would be
regulated and controlled by the Registrar of Co- operative Societies. The board of
directors would establish a board of management, which shall be entrusted with
the responsibility for the control and direction of the affairs of the Bank assisted by
a CEO who shall have the responsibility for the management of the Bank. RBI would
have powers to control and regulate the functioning of the Bank and of its board of
management and of the Chief Executive Officer (CEO) in exactly the same way as it
controls and regulates the functioning of the Board and the Chief Executive in the
case of a commercial bank.
4. On the issue of companies accepting deposits, the members of the WG deliberated
at length. It was pointed out to the WG that the RBI had, in its presentation before the
Commission submitted that; “Only banks, statutory corporations, companies and
co-operative societies regulated by the RBI should be allowed to accept deposits
from public”. While some members were of the opinion that the issue of companies
accepting deposits is beyond the purview of this WG, other members expressed the
opinion that deposit taking activities should be restricted only to banks. On the
question of whether this issue falls within the ambit of this WG, the members deliberated
that the Reserve Bank of India Act, 1934 (RBI Act) already prohibits partnership
firms from accepting deposits. Hence some members of the WG recommended
extending this prohibition to corporates accepting deposits as well. This requires
amending Section 58A of the Companies Act, 1956. The proposed Companies Bill of
2011 is a step in this direction. It places restrictions on the acceptance of deposits by
companies. It lays down the procedure for acceptance of deposits by members. A
limited class of companies including banks and non- banking financial companies
are allowed to accept deposits from public.
5. On the issue of NBFCs, this WG recommends that deposit taking NBFCs must obtain a
license to operate as a bank and will fall within the regulatory purview of the banking
regulator. The class of NBFCs that do not accept deposits from public will not
be regulated by the banking regulator.
6. This WG also considered and debated the recommendations of Vickers Report (2011)
and on the issue of ring fencing:
(a) This WG recognises the significant role played by NBFCs in providing finance.
However, with a view to systemic risk oversight, this WG recognises that credit
linkages between banking and non-bank finance should be subject to appropriate
regulatory oversight from the viewpoints of both micro-prudential regulation
and systemic risk regulation.
(b) Once transition to the Financial Holding Company (FHC) structure, as contained
in the recommendation of this WG, is achieved subsidiaries of banks
must only do such activities which banks themselves can undertake.
FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION 183