BRBL Module B - Slide-wise Notes

Slide 4: PREVENTION OF MONEY LAUNDERING ACT, 2002

 Political Declaration adopted by the Special Session of the United Nations General
Assembly held on 8th to 10th June, 1998 called upon the Member States to adopt
national money-laundering legislation and programme
 The Act was enacted in India in January 2003 and made effective from 1.7.2005
 The Act was amended in 2012

Slide 5: stages of money laundering

 Placement: This is the initial stage where illicit funds are introduced into the financial
system
 This can involve depositing large amounts of cash into bank accounts, purchasing
monetary instruments like traveller's checks, or using smurfing (breaking down large
sums into smaller, less conspicuous deposits)
 Layering: In this stage, the money is moved through a series of transactions to obscure
its origin
 This might involve multiple transfers between different accounts, converting currencies,
or using shell companies to further complicate the trail
 Integration: This final stage is where the laundered money is reintroduced into the
legitimate economy

Slide 6: Section 3 – guilty of money laundering

 A person shall be guilty of offence of money-laundering if such person is found to have
directly or indirectly attempted to indulge or knowingly assisted or knowingly is a party
or is actually involved in one or more of the following processes or activities connected
with proceeds of crime
 (a) concealment; or (b) possession; or (c) acquisition; or (d) use; or (e) projecting as
untainted property; or (f) claiming as untainted property, 6

Slide 7: Section – 4 - punishment

 Whoever commits the offence of money-laundering shall be punishable with rigorous
imprisonment for a term which shall not be less than three years but which may extend
to seven years and shall also be liable to fine
 Offences under the narcotic drugs and psychotropic substances may extend upto 10
years
Slide 8: Section - 11 – OBLIGATIONS OF BANKING COMPANIES, FINANCIAL
INSTITUTIONS AND INTERMEDIARIES
 Verification of Identity by Reporting Entity Every Reporting Entity shall verify the
identity of its clients and the beneficial owner, by— (a) authentication under the
Aadhaar if the reporting entity is a banking company
 Any other Officially Valid Documents prescribed such as Passport, Aadhar Letter etc

Slide 9: Section – 12 Reporting entity to maintain records

 maintain a record of all transactions in such manner as to enable it to reconstruct
individual transactions; furnish to the Director within such time as may be prescribed,
information maintain record of documents evidencing identity of its clients and
beneficial owners as well as account files and business correspondence relating to its
clients
 ( every information maintained, furnished or verified, shall be kept confidential
 The records shall be maintained for a period of five years from the date of transaction
between a client and the reporting entity or five years when the account has been closed
whichever is later

Slide 10: Section – 12 aa - Enhanced due diligence

 a) Every reporting entity shall, prior to the commencement of each specified
transaction,— (a) verify the identity of the clients undertaking such specified
transaction by authentication under the Aadhaar
 (b) take additional steps to examine the ownership and financial position, including
sources of funds of the client
 (c) take additional steps as may be prescribed to record the purpose behind conducting
the specified transaction and the intended nature of the relationship between the
transaction parties
 “specified transaction” means— (a) any withdrawal or deposit in cash, exceeding such
amount; (b) any transaction in foreign exchange, exceeding such amount; (c) any
transaction in any high value imports or remittances; (d) such other transaction or class
of transactions, in the interest of revenue or where there is a high risk or money-
laundering or terrorist financing, 10

Slide 11: Section – 13 – powers of director to impose fine

 Incase the director finds that the persons or others if they are not cooperating with the
directors of the Director may - Issue warning letter Direct to comply with specific
instructions Direct to submit report at specified intervals regarding compliance as
above Can impose levy of not less than Rs
 25,000 (maximum Rs
 1 lakh) for each failure A director in the board may be nominated as Designated
Director for compliance 11
Slide 12: Rule – 3 - Maintenance of records
 Prevention of Money-laundering (Maintenance of Records) Third Amendment Rules,
2023
 Every reporting entity shall maintain the record of all transactions including, the record
of (A) all cash transactions of the value of more than ten lakhs rupees or its equivalent
in foreign currency; (B) all series of cash transactions integrally connected to each other
which have been individually valued below rupees ten lakhs or its equivalent in foreign
currency where such series of transactions have taken place within a month and the
monthly aggregate exceeds an amount of ten lakh rupees or its equivalent in foreign
currency; © all transactions involving receipts by non-profit organisations of value
more than rupees ten lakh, or its equivalent in foreign currency; (D) all cash
transactions where forged or counterfeit currency notes or bank notes have been used
as genuine or where any forgery of a valuable security or a document has taken place
facilitating the transactions; (E) all cross border wire transfers of the value of more than
five lakh rupees or its equivalent in foreign currency where either the origin or
destination of fund is in India; 12

Slide 13: Rule – 4 – information in records

 The records referred to in rule 3 shall contain all necessary information specified by the
Regulator to permit reconstruction of individual transaction including the following
information:- (a) the nature of the transactions; (b) the amount of the transaction and
the currency in which it was denominated; (c) the date on which the transaction was
conducted; and (d) the parties to the transaction
 13

Slide 14: Rule – 8 – information to fiu -ind

 14

Slide 15: Reporting of transactions

 The debit transactions in the above example are integrally connected cash transactions
because total cash debits during the calendar month exceeds Rs
 10 lakhs
 However, the bank should report only the debit transaction taken place on 02/04 &
08/04/2008
 The debit transaction dated 07/04/2008 should not be separately reported by the bank,
which is less than Rs
 50,000/-

Slide 16: Rule – 4 – client due diligence

 Every reporting entity shall at the time of commencement of an account-based
relationship or while carrying out occasional transaction of an amount equal to or
exceeding rupees fifty thousand, whether conducted as a single transaction or several
transactions that appear to be connected, or any international money transfer
operations,- (a) identify its clients, verify their identity using reliable and independent
 sources of identification, obtain information on the purpose and intended nature of the
business relationship, where applicable; (b) take reasonable steps to understand the
nature of the customer’s business, and its ownership and control; (c) determine
whether a client is acting on behalf of a beneficial owner, and identify the beneficial
owner and take all steps to verify the identity of the beneficial owner, using reliable and
independent sources of identification: 16

Slide 17: Rule – 9 – beneficial owner

 17 The Non Profit Organizations information should be registered in NITI Aayog’s
Darpan portal

Slide 19: Negotiable instruments act, 1881

 The Act came to force from 1.3.1882 and extends to whole of India
 The act has 148 sections made in 17 chapters
 Section 138 to 142 were added in 1988 Section 143 to 147 were added in 2018

Slide 20: Presumptions as to negotiable instruments.

 Until the contrary is proved, the following presumptions shall be made:— (a) of
consideration:—that every negotiable instrument was made or drawn for
consideration, and that every such instrument, when it has been accepted, indorsed,
negotiated or transferred, was accepted, indorsed, negotiated or transferred for
consideration (b) as to date:—that every negotiable instrument bearing a date was
made or drawn on such date; (c) as to time of acceptance:—that every accepted bill of
exchange was accepted within a reasonable time after its date and before its maturity;
(d) as to time of transfer:—that every transfer of a negotiable instrument was made
before its maturity; (e) as to order of indorsements:—that the indorsements appearing
upon a negotiable instrument were made in the order in which they appear then on; 20

Slide 21: Presumptions as to negotiable instruments.

 (f) as to stamp:— It is a presumption that a lost promissory note, bill of exchange or
cheque was duly stamped; (g) that holder is a holder in due course:—that the holder of
a negotiable instrument is a holder in due course: provided that, where the instrument
has been obtained from its lawful owner, or from any person in lawful custody thereof,
by means of an offence or fraud
 21

Slide 22: Section – 4 - Promissory note

 PROMISSORY NOTE - Section 4 – A promissory note is an instrument in writing (not
being a bank note or a currency note) containing an unconditional undertaking signed
by the maker to pay a certain sum of money only to, or to the order of, a certain person,
or to the bearer of the instrument
 The following are not promissory notes Mr
 B IOU Rs
 1000 I promise to pay B Rs
 500 and other sums which shall be due to him

Slide 24: Section – 5 bill of exchange

 It 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 promise or order to pay is not conditional
 It must be in writing
 It must be signed by the drawer
 The drawer, drawee and payee must be certain

Slide 26: Section – 6 cheque

 A cheque is defined as “A cheque is bill of exchange drawn on a specified banker and not
expressed to be payable otherwise than on demand and it includes electronic image of a
truncated cheque and a cheque in electronic form
 Electronic form signed with digital signature
 Drawer is the account holder signing the cheque; Drawee is always the bank branch
where the account holder maintains his account
 Payee is the beneficiary who will receive the amount mentioned in the cheque 26

Slide 28: payment of cheques

 As per Section 31 the cheque is payable only when the drawer has sufficient funds in his
account
 The funds should not have been earmarked for some other purpose
 The cheque should be properly drawn and signed by the drawer
 In case of wrongful dishonour bank need to pay compensation only to the drawer
 In the case of winding up of the bank, the holder of the cheque need to be paid
compensation

Slide 29: Holder of a negotiable instrument

 Section 8 defines holder of NI as any person entitled in his own name to the possession
thereof and to receive or recover the amount due thereon from the parties thereto
 Where the note, bill or cheque is lost or destroyed its holder is the person so entitled at
the time of such loss or destruction
 Physical possession is not required
 A person who receives the cheque through fraudulent or forgery can not be holder of
the instrument
 29

Slide 30: Holder in due course

 Section 9 of the Act defines holder in due course means any person who for
consideration became the possessor of the instrument if payable to bearer or the payee
or endorsee thereof, if payable to order, before the amount mentioned in it became
 payable and without having sufficient cause to believe that any defect existed in the tile
of the person who he derived his title
 The holder in due course should satisfy the following conditions
 Instrument acquired for consideration
 Instrument acquired before maturity
 No cause to believe that defect exists

Slide 31: Holder for value

 When a Bank to oblige a customer for any reason, pays the amount of the cheque drawn
on another bank before its collection, the position of the bank is that of holder for value
 The payee however without knowing that the cheque had been stopped and the branch
manager of another bank in good faith advanced money on the cheque not having notice
that the cheque had been stopped, is still considered as the holder for value
 This is the case when Banks purchase cheques for the customers
 31

Slide 32: payment in due course

 Section 10 - “Payment in due course”
 —“Payment in due course” means payment in accordance with - the apparent tenor of
the instrument in good faith and without negligence to any person in possession thereof
under circumstances which do not afford a reasonable ground for believing that he is
not entitled to receive payment of the amount therein mentioned
 The paying banker is under an obligation to honour cheque subject to some conditions,
being satisfied.
 There must be sufficient funds in the customer’s account on which cheque is drawn

Slide 33: When can bank refuse payment

 Crossed cheque
 Open cheque – (incase of notice of death, insolvency of the drawer) 2
 Drawn on a specific branch

Slide 34: When can bank refuse payment

 Chronological order of payment
 (as and when they are presented) (Banks or honor instruments as presented, first-
come-first-served, without reordering by date
 Garnishee Order

Slide 35: Material alteration

 Any alteration by the endorsee as to Date Payee’s name Amount in words Amount in
figures Conversion of order cheque to bearer Conversion of a crossed cheque to open
cheque It Will render the endorser not liable therefor
 Endorsers (those who sign the back to transfer the cheque) guarantee payment if it
bounces, but this ends if the crossing is opened
 The conversion removes the cheque's restrictive terms, so prior endorsers are no longer
responsible

Slide 36: Protection to bankers

 Section 85 (1) - Protection in case of forged endorsements in an order cheque: If a
cheque payable to order is endorsed by or on behalf of the payee, the drawee is
discharged by payment to the endorsee
 The paying banker is protected if the endorsement is not genuine, provided the
endorsement/s is/are regular, and the payment is made in due course as per Sec
 10
 Protection in case of forged endorsements in a bearer cheque (Sec
 85 (2)): If a cheque is payable to bearer, the drawee is discharged by payment in due
course to the bearer, notwithstanding any endorsement appearing on the instrument
Protection in case of forged endorsements in a draft (Sec

Slide 37: Types of bills

 Section : 11 Inland Bill : A promissory note, bill of exchange or cheque drawn or made
in India and made payable in or drawn upon any person resident in India shall be
deemed to be an inland instrument
 Section : 12 Foreign Bill : Drawn outside India and made payable in or drawn upon any
person, resident in any country outside India; or Drawn outside India and made payable
in or drawn upon any person, resident in India

Slide 38: endorsement

 Section : 15 When the maker or holder of a negotiable instrument signs the same,
otherwise than as such maker, for the purpose of negotiation, on the back or face
thereof or on a slip of paper annexed thereto, or so signs for the same purpose a
stamped paper intended to be completed as a negotiable instrument, he is said to
indorse the same, and is called the “indorser”

Slide 39: Types of endorsements

 Blank Indorsement (Section 16 – If the endorser signs his name only
 a negotiable instrument indorsed in blank is payable to the bearer thereof even
although originally payable to order
 Indorsement in Full (Section 16 – If it payable to order or of a specified person
Restrictive Indorsement (Sec
 50) – The right of the holder restricts further indorsement
 For example – Pay the contents to “C” only

Slide 40: Types of endorsements

 Partial Indorsement (Sec
 56) – No writing on a negotiable instrument is valid for the purpose of negotiation if
such writing purports to transfer only a part of the amount appearing to be due on the
 instrument; but where such amount has been partly paid, a note to that effect may be
indorsed on the instrument, which may then be negotiated for the balance
 Facultative Endorsement - is an endorsement where the endorser waives some right to
which he is entitled
 For example, the endorsee is liable to give notice of dishonour to the endorser and
normally failure to give notice will absolve the endorser from his liability
 Forged Endorsement (Section 58) - When a negotiable instrument has been lost, or has
been obtained from any maker, acceptor or holder thereof by means of an offence or
fraud, or for an unlawful consideration, no possessor or indorsee who claims through
the person who found or so obtained the instrument is entitled to receive the amount
due thereon from such maker, acceptor or holder, or from any party prior to such
holder, unless such possessor or indorsee is, or some person through whom he claims
was, a holder thereof in due course

Slide 41: amount in words and figures differ

 Section 18 : If the amount undertaken or ordered to be paid is stated differently in
figures and in words, the amount stated in words shall be the amount undertaken or
ordered to be paid

Slide 42: Types of bills

 Section 19 : A promissory note or bill of exchange or cheque, in which no
time for payment is specified, are payable on demand
 They are also called sight bills
 A Bill payable otherwise than ‘on demand’ is known as ‘Usance Bill’ Section 22 - Days of
grace
 —Every promissory note or bill of exchange which is not expressed to be payable on
demand, at sight or on presentment is at maturity on the third day after the day on
which it is expressed to be payable
 If due date falls on impossible date (say 30th Feb) (If the month in which the period
would terminate has no corresponding day, the period shall be held to terminate on the
last day of such month) When the day on which a promissory note or bill of exchange is
at maturity is a public holiday, the instrument shall be deemed to be due on the next
preceding, business day

Slide 43: example

 An Inland bill is drawn for an amount of Rs
 2 lakhs on B on 23 September 2024
 the bills is payable after 4 months from the date of the bill
 The legal due date of the bill will be 23 September + 4 months + 3 days = 26th January
 26th being public holiday, the due date will be 25th January Public Holidays: If the
calculated due date falls on a public holiday (like Republic Day, Independence Day, etc

Slide 44: Noting and protesting

 SECTION 99 - Noting
 —When a promissory note or bill of exchange has been dishonoured by non-acceptance
or non-payment, the holder may cause such dishonour to be noted by a notary public
upon the instrument, or upon a paper attached thereto, or partly upon each
 Such note must be made within a reasonable time after dishonour, and must specify the
date of dishonour, the reason, if any, assigned for such dishonour, or, if the instrument
has not been expressly dishonoured, the reason why the holder treats it as dishonoured,
and the notary's charges
 SECTION 100
 - Protest

Slide 45: SECTION – 20 – INCHOATE INSTRUMENT

 A negotiable instrument which is signed but not filled in either partly or fully is called
Inchoate instrument
 Any holder can complete the instrument but without any alternation / overwriting
thereafter If altered the authentication of the Drawer is required If not authenticated by
the drawer, it is treated as materially altered instrument

Slide 46: SECTION – 25 PUBLIC HOLIDAY

 The expression “public holiday” includes Sundays: and any other day declared by the
[Central Government], by notification in the Official Gazette, to be a public holiday

Slide 47: IMPORTANT SECTIONS

 Section 26 : Minor can draw, endorse, deliver and negotiate the negotiable instrument
so as to bind all other parties to the negotiable instrument except himself Section 30 :
Drawer : The drawer of a bill of exchange or cheque is bound in case of dishonour by
the drawee or acceptor thereof, to compensate the holder, provided due notice of
dishonour has been served to him Section 31 : Banker as Drawee : The drawee of a
cheque having sufficient funds of the drawer in his hands properly applicable to the
payment of such cheque must pay the cheque when duly required so to do, and, in
default of such payment, must compensate the drawer for any loss or damage caused
by such default
 Section 32 : Drawee / Payee : The maker of a promissory note and the acceptor of a bill
of exchange are bound to pay the amount thereof at maturity according to the apparent
tenor of the note In default of such payment as aforesaid, such maker or acceptor is
bound to compensate any party to the note or bill for any loss or damage sustained by
him and caused by such default

Slide 48: IMPORTANT SECTIONS

 Section 35 : Endorser : Whoever indorses and delivers a negotiable instrument before
maturity, is bound thereby to every subsequent holder, in case of dishonour by the
drawee, acceptor or maker, to compensate such holder for any loss or damage caused
to him by such dishonour, provided due notice of dishonour has been given to, or
received by the endorser Section 36 : Prior parties : Every prior party to a negotiable
 instrument is liable thereon to a holder in due course until the instrument is duly
satisfied
 Section 47 : Bearer Cheque : Instrument payable to bearer : the instrument is negotiable
by mere delivery Section 48 Order Cheque : Instrument payable to order : the
instrument is negotiation by endorsement and delivery

Slide 49: IMPORTANT SECTIONS

 Section : 63 : Time allowed for acceptance of Bill of Exchange : Bill of exchange must
be accepted within 48 hours (excluding public holidays)
 But the holder should present the bill for acceptance within 24 hours of its receipt
 Section : 65 : Payment of Cheques
 Instruments presented during business hours can be paid on the same day Instruments
presented after business hours to be paid on next working day No protection available
if paid after business hours (e
 g

Slide 50: SECTION : 80 - NO INTEREST SPECIFIED

 When no rate of interest is specified in the instrument, interest on the amount due
thereon shall, notwithstanding any agreement relating to interest between any parties
to the instrument], be calculated at the rate of eighteen per centum per annum, from the
date at which the same ought to have been paid by the party charged, until tender or
realization of the amount due thereon, or until such date after the institution of a suit to
recover such a mount as the court directs

Slide 51: CROSSING OF A CHEQUE

 General crossing: Sec 123 - across of the cheque two parallel transverse lines , either
with or without words ‘not negotiable’, & Co
 , Account payee etc
 Special Crossing: Sec 124 - where a cheque bears across its face an addition of the name
of the banker either with or without words ‘not negotiable’ and deemed to be crossed
specially, and to be crossed to that banker
 It is a direction to the paying banker to pay only to the bank whose name appears in the
crossing

Slide 52: SECTION 130 : NOT NEGOTIABLE CROSSING

 A person taking a cheque crossed generally or specially, bearing in either case the
words “not negotiable”, shall not have and shall not be capable of giving, a better title to
the cheque than that which the person from whom he took it had
 The transferee may not get better title than that of the transferor Account Payee
crossing: For more protection sometimes the words like “A/c Payee” or “Payee’s A/c
only” are added to the crossing, though not specified in the NI Act
 It is a practice widely followed
 This is a direction to the collecting bank to collect the proceeds for the payee’s account
only
 RBI has directed banks to collect ‘Account Payee’ cheques only for the named payee

Slide 53: Types of crossing

Slide 54: SECTION 126 : PAYMENT OF A CROSSED CHEQUE

 Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it
otherwise than to a banker
 Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it
otherwise than to the banker to whom it is crossed, or his agent for collection A cheque
can be specially crossed more than once (more than one banker) only if the first bank
collects the cheque as an agent for the second bank (section 127)

Slide 55: SECTION 131 – PROTECTION TO COLLECTING BANKER

 A collecting banker is protected by way of collecting the cheque, even if the title to the
cheque proves defective later against the true owner of the cheque Provided A banker
receives payment of a crossed cheque for collection and he receives payment for credit
of his customer’s account (no such protection available for non- customer) And
notwithstanding that he credits his customer’s account with the amount of the cheque
before receiving payment thereof It shall be the duty of the collecting banker to verify
the prima facie genuineness of the cheque to be truncated and held responsible for any
fraud, forgery or tampering apparent on the face of the instrument that can be verified
with due diligence and ordinary care

Slide 56: DUTIES OF COLLECTING BANK

 Duty to open the Account with references and sufficient documentary proof as advised
by RBI Duty to confirm the reference where the referee is not known or has given
reference in absentia: Duty to follow the KYC norms under prevention of money
laundering act/ rules and KYC directions Duty to ensure crossing and special crossing:
Duty to verify the instruments for any apparent defect in the instruments; Duty to take
into account the state of customer’s account: Negligence of collecting bank in collecting
cheques payable to third parties:

Slide 57: Dishonour of a cheque

 Section 138 : If a cheque issued by a person to another person for the discharge, in
whole or any part of any debt or other liability is returned by the bank unpaid, on
account of insufficient funds in the account or exceeds the agreement made with that
bank; such person is deemed to have committed an offence, and liable to be punished
with imprisonment up to two years or with fine up to to twice the amount of the cheque
or with both, if following conditions are satisfied: (a) The cheque has been presented
within the validity period i
 e
 three months of the date of cheque, (b) A demand for payment is made by notice within
30 days of the return of cheque, and (c) The drawer fails to make payment within 15
days of receipt of the notice
 Section 141 : If the person committing an offence is a company (including a firm or
association of individuals), then every person who is responsible for such offence, as
well as the company, are guilty of the offence

Slide 59: procedure

 Offence under Secs
 138/141 shall be tried by a Judicial Magistrate or by Metropolitan Magistrate of the first
class
 It shall be lawful for the magistrate to pass a sentence of imprisonment for a term not
exceeding two years and an amount of fine not exceeding twice the amount of the
cheque
 Under Section 148 if an appeal by the drawer against conviction under Sec
 138, the appellate court may order the appellant to deposit such sum which shall be a
minimum of 20% of the fine or compensation awarded by the trial court

Slide 60: POSITIVE PAY SYSTEM

 Positive Pay is a process of validating/confirming the key details of cheques to deter
Cheque frauds (applicable on high value cheques amounting Rs 50000/- and above)
 Customers need to submit in advance the key details of cheques issued to the
beneficiaries so that Bank can pass cheque in CTS clearing without contacting the
customers
 In case of any mismatch Bank can reject the cheque or take suitable action to prevent
wrong payment or fraud
 The Positive Pay facility in Bank is available free of cost

Slide 66: FOREIGN EXCHANGE TRANSACTIONS

Slide 67: FOREX REGULATIONS IN INDIA

Slide 68: FEMA, 1999

 Exchange control was introduced under Defence of India Rules on 3.9.1939
 Foreign Exchange Regulation Act, 1947 was passed in 1947 for a period of ten years
 The Foreign Exchange Regulation Act (FERA) was legislation passed in 1973 repealing
the 1947 act, imposed strict regulations on certain kinds of payments, the dealings in
foreign exchange and securities and the transactions which had an indirect impact on
the foreign exchange and the import and export of currency

Slide 69: FEMA, 1999

 Authorities governing the enforcement of FEMA Foreign Exchange Department of
Reserve Bank of India (RBI) Directorate of Enforcement, Department of Revenue,
Ministry of Finance Capital Markets Division, Department of Economic Affairs, Ministry
of Finance Investment Division, Department of Economic Affairs, Ministry of Finance
Foreign Trade Division, Department of Economic Affairs, Ministry of Finance
 Machinery responsible for various aspects of FEMA Enforcement Directorate
 Adjudicating Authority Special Director (Appeals) Appellate Tribunal Foreign Exchange
Department of RBI Foreign Investment Promotion Board 69

Slide 70: FEMA 1999

 Chapter 1 – Definition Chapter 2 – Regulation and Management of Foreign Exchange
Chapter 3 – Authorised Person Chapter 4 – Contravention and Penalties Chapter 5 –
Adjudication and Appeal Chapter 6 – Directorate of Enforcement Chapter 7 –
Miscellaneous Provisions

Slide 74: CAPITAL ACCOUNT & CURRENT ACCOUNT TRANSACTIONS

 Capital account transaction" means a transaction which alters the assets or liabilities,
including contingent liabilities, outside India of persons resident in India or assets or
liabilities in India of persons resident outside India ( Section 2 (e) of FEMA) Current
account transaction" means a transaction other than a capital account transaction and
without prejudice to the generality of the foregoing such transaction includes,- (i)
payments due in connection with foreign trade, other current business, services, and
short-term banking and credit facilities in the ordinary course of business, payments
due as interest on loans and as net income from investments, (iii) remittances for living
expenses of parents, spouse and children residing abroad, and (iv) expenses in
connection with foreign travel, education and medical care of parents, spouse and
children; (Section 2 (j) of FEMA)

Slide 77: CAPITAL ACCOUNT & CURRENT ACCOUNT TRANSACTIONS

 Section 2 (e) of FEMA Import or export of currency
 Borrowing or lending
 Acquisition of property
 Obtaining an Insurance
 Issuance of a Guarantee

Slide 78: AUTHORISED PERSONS

Slide 79: SECTION : 3 : POWERS OF RBI

 To appoint authorized persons No person other than an authorized person by RBI to
deal or transfer foreign exchange or foreign security No person other than an AP to
make any payment or for the credit of any person resident outside India in any manner
Receive from person outside India, only through an AP
 Such receipt should be supported by corresponding remittance from outside India
 (explain hawala) There is no bar on a person resident outside India to hold, own
transfer or invest in foreign currency, foreign security or any immovable property
situation outside India Every exporter of goods to repatriate to India such export
proceeds Export proceeds cannot be held in foreign countries
Slide 80: Authorised person
 Section 10 (1) :Powers of RBI under FEMA The Reserve Bank may, on an application
made to it in this behalf, authorise any person to be known as authorised person to deal
in foreign exchange or in foreign securities, as an authorised dealer, money changer or
off-shore banking unit or in any other manner as it deems fit
 Section 10 (5) An authorised person shall, before undertaking any transaction in foreign
exchange on behalf of any person, require that person to make such declaration and to
give such information as will reasonably satisfy him that the transaction will not
involve, and is not designed for the purpose of any contravention or evasion of the
provisions of this Act or of any rule, regulation, notification, direction or order made
thereunder, and where the said person refuses to comply with any such requirement or
makes only unsatisfactory compliance therewith, the authorised person shall refuse in
writing to undertake the transaction and shall, if he has reason to believe that any such
contravention or evasion as aforesaid is contemplated by the person, report the matter
to the Reserve Bank
 Section 12 : To inspect books

Slide 81: PENALTIES

 Any violation of provisions laid down in the Act attract penal provisions(section 13) Any
contravention to provisions of the Act, rules, regulations, notification, direction, order is
liable to a penalty Thrice the amount involved where amount can be quantified Up to
Rupees Two lakhs where amount is not quantifiable Where contravention continues,
further penalty which can be extend up to Rs
 5000/- every day after the first day Section 13 - (1 A) : acquired foreign exchange,
foreign security or immovable property situated outside India in excess of the
threshold prescribed under the proviso to sub-section (1) of Section 37A - penalty up to
3 times of sum involved

Slide 82: PENALTIES

 Section (13 – 1 B) : In a proceedings under Sub-section 1 A above, deems fit, the
adjudicating authority can recommend for initiation of prosecution
 The Director of Enforcement, if satisfied, can direct prosecution by filing a criminal
complaint against the guilty person
 The competent officer in the directorate for this purpose is an officer not below the
rank of Assistant Director
 Section (13 - 1 C) : if contravention is proved under the proviso to sub-section (1) of
section 37A, in addition to penalty as laid down under Sub-section 1 A above, he/she is
punishable with imprisonment for a term which may extend to five years and with fine
 Section (13 - 1 D) : The court shall take cognizance of an offence under sub-section (1 C)
upon a written complaint by an officer not below the rank of Assistant Director

Slide 83: Adjudication and APPEAL

 Section 16 – Appointment of Adjudicating Authority
 The Central Govt will appoint Adjudicating Authority
 The adjudicating authority will have the authority of a civil court
 Section 17 - Appeal to Special Director (Appeals)
 —(1) The Central Government shall, by notification, appoint one or more Special
Directors (Appeals) to hear appeals against the orders of the Adjudicating Authorities

Slide 84: DIRECTORATE OF ENFORCEMENT

 Central Govt
 establishes a Directorate of enforcement established for enforcement (section 36) It
includes a Director and other officers called ‘officers of enforcement’ Not below the rank
of an assistant director can investigate contravention
 He has the power of search and seizure Central government can entrust officers in the
central government, state government or RBI, Custom officials or police officer to
investigate contravention (section 38) They have powers to search, seizure

Slide 85: ASSETS HELD OUTSIDE INDIA

 SPECIAL PROVISIONS An authorized officer prescribed by Central Govt
 can seize assets held outside India which are acquired in contravention of section 4,
provided aggregate value of such foreign exchange, foreign security or any immovable
property, situated outside India is in excess of the threshold value prescribed The order
of seizer shall be paced before the competent authority prescribed by Central Govt
 , an officer not below the rank of Joint Secretary to Govt
 within 30 days from the date of seizure The competent authority to dispose it off within
180 days from the date of seizure The aggrieved person to this order can prefer appeal
before Appellate Tribunal

Slide 92: PAYMENT REGULATORY BOARD

 This board consist of :- RBI Governor (Chairperson- who is ex-officio) Deputy Governor
of RBI (in charge of P & SS- ex-officio) Officer nominated by Central Board of RBI (ex-
officio) Three persons nominated by Central Government

Slide 93: PAYMENTS & SETTLEMENT SYSTEMS ACT 2007

 Settlement is the process of transferring of funds through a central agency from payer to
payee
 Gross settlement is where transaction are settled on a one to one basis
 Net settlement – a large number of transactions are accumulated between the
counterparties and offset against each other with only the net differential being
transferred at predetermined times

Slide 94: WHAT IS SETTLEMENT FINALITY?

 Settlement finality in India is the legal and operational guarantee that a financial
transaction—whether it involves money, securities, or derivatives—is complete,
irrevocable, and cannot be unwound or reversed, even if one of the participating parties
goes bankrupt or defaults
 The PSS Act, 2007: Settlement finality is legally established under Section 23 of the
Payment and Settlement Systems (PSS) Act, 2007
 It mandates that once a payment instruction has been settled (either on a gross or net
basis), it is final and irrevocable
 Zero Reversal Risk: Once funds successfully leave your account via networks like RTGS
or UPI, the transaction cannot be arbitrarily cancelled by the sending bank due to
technical errors or later disputes
 Systemic Stability: By preventing "unwinding," settlement finality avoids chain-reaction
defaults or contagion if a major bank or financial institution were to fail

Slide 95: SYSTEM PARTICIPANTS

 "system participant" means a bank or any other person participating in a payment
system and includes the system provider "system provider" means a person who
operates an authorised payment system RBI has since authorised various Payment
System Operators (PSOs) such as CCIL (financial market infrastructure - central
counterparty), NPCI (retail payments organisation), card payment networks, cross-
border inbound money transfers entities, ATM networks, PPI issuers, Instant Money
Transfer operators, TReDS platform (Trade Receivable and electronic Discounting
system

Slide 96: SYSTEM PROVIDER

 System Providers are those entities providing operations for clearing, settlement or
payment Also will include entities operating money transfer system or card transfer
system (credit card, debit card, smart card operations) Any entity can function as
system provider with RBI permission Foreign entity can also participate in payment
system The system provider has to keep all the personal details/documents of the
system participant as secret
 They should not disclose these details to others The system provider should have a
proper dispute redressal mechanism

Slide 97: PAYMENT SERVICE PROVIDERS

 Paytm and PhonePe are considered Payment Service Providers (PSPs), which are
authorized entities that facilitate UPI transactions by providing the technology and
infrastructure for users to initiate payments through their apps
 PSPs act as intermediaries between users and their banks, enabling UPI transactions
through mobile apps, websites, or POS machines
 They provide the technology and infrastructure that allows users to initiate UPI
transactions, ensuring seamless and secure transactions
 UPI is a real-time payment system developed by the National Payments Corporation of
India (NPCI) that allows users to instantly transfer funds between bank accounts
through their smartphones
 PhonePe is a TPAP (Third Party Application Provider) authorized by NPCI to facilitate
payments through sponsor PSP Bank(s) namely Yes Bank Ltd
Slide 101: LAWS RELATING TO SECURITIES AND MODES OF CHARGE - I

Slide 102: TYPES OF SECURITY

 IMMOVEABLE SECURITY – Mortgage MOVEABLE SECURITY - Hypothecation , Pledge
 PAPER SECURITY - Assignment MONEY SECURITY – Lien, Set-off

Slide 103: MORTGAGE

 The law, relating to mortgages is dealt with in the Transfer of Property Act, 1882, and
more particularly in Sec
 58 to 99 and 102 to 104
 Sec
 58(a) of the Transfer of Property Act, 1882 defines a mortgage as follows: 'A mortgage
is the transfer of interest in specific immoveable property, for the purpose of securing
the payment of money advanced or to be advanced by way of loan, on existing or future
debt or the performance of an engagement which may give rise to a pecuniary liability
 ’ The transferor is called a mortgagor

Slide 104: Types of MORTGAGEs

 SIMPLE MORTGAGE MORTGAGE BY CONDITIONAL SALE USUFRUCTUARY MORTGAGE
ENGLISH MORTGAGE MORTGAGE BY DEPOSIT OF TITLE DEEDS (EQUITABLE
MORTGAGE) ANAMALOUS MORTGAGE

Slide 108: SIMPLE MORTGAGE

 According to Sec
 58(b) of the Transfer of Property Act, a simple mortgage is a transaction whereby,
‘without delivering possession of the mortgaged property, the mortgagor binds himself
personally to pay the mortgage money and agrees, expressly or impliedly, that in the
event of his failing to pay according to his contract, the mortgagee shall have a right to
cause the mortgaged property to be sold by a decree of the Court in a suit and the
proceeds of the sale to be applied so far as may be necessary in payment of the
mortgage money
 ’ Essentials of a simple mortgage: (i) The mortgagor does not deliver possession of the
mortgaged property to the mortgagee
 (ii) The mortgagor binds himself personally to pay the mortgage money
 (iii) The mortgagor agrees that in the event of his failing to pay according to his
contract, the mortgagee shall have a right to get the mortgaged property sold and
recover his dues

Slide 109: MORTGAGE BY CONDITIONAL SALE

 As per Sec
 58(c) of the Transfer of Property Act, a mortgage by way of a conditional sale of the
property is a transaction whereby the mortgagor ostensibly sells the mortgaged
property on the condition that: on default of payment of the mortgage money on a
certain date, the sale shall become absolute, or (ii) on such payment being made the
 sale shall become void; or (iii) on such payment being made, the buyer shall transfer the
property to the seller
 No such transaction shall be deemed to be a mortgage of conditional sale, unless the
condition is embodied in the document, which effects or purports to effect the sale
 The essential features of a mortgage by conditional sale are as follows - (i) The
mortgagor ostensibly sells the mortgaged property to the mortgagee but it is not real
sale; (ii) If the money is not repaid on the agreed date, the ostensible sale will become
absolute upon the mortgagor applying to the Court and getting a decree in his favour;
(iii) The mortgagor in such a case (the sale becoming absolute) loses his right to redeem
his property

Slide 110: MORTGAGE BY CONDITIONAL SALE

 (iv) The mortgagee can sue for absolutely debarring the mortgagor of his right to
redeem the mortgaged property, but not for sale of the property
 (v) Foreclosure means loss of the right possessed by the mortgagor to redeem the
mortgaged property
 (vi) On payment being made by the mortgagor, the sale shall become void, or the buyer
(mortgagee) shall transfer the property to the seller (mortgagor)
 (vii) There is no personal covenant for repayment of the debt
 (viii) The mortgagee cannot look to the other properties of the mortgagor in case the
mortgaged property proves insufficient

Slide 111: USUFRUCTUARY MORTGAGE

 According to Sec
 58(d) of the Transfer of Property Act, ‘a Usufructuary mortgage’ is a transaction in
which - the mortgagor delivers possession expressly, or by implication and binds
himself to deliver possession of the mortgaged property to the mortgagee; and (ii)
authorises the mortgagee to retain such possession until payment of the mortgage
money and to receive the rents and profits accruing from the property or any part of
such rents and profits and to appropriate the same in lieu of interest, or in payment of
the mortgage money, or partly in lieu of interest and partly in payment of the mortgage
money
 The mortgagee in this case is called as a ‘usufructuary mortgagee’
 The mortgagee has the right to receive the rents and profits accruing from the property
 Such rents and profits or part thereof, may be appropriated in lieu of interest or in
payment of the mortgage money or partly for both

Slide 112: ENGLISH MORTGAGE

 According to Sec
 58(e) of the Transfer of Property Act, an ‘English Mortgage’ is a transaction in which, the
mortgagor binds himself - ‘to repay the mortgage money on a certain date and transfers
the mortgaged property absolutely to the mortgagee, but subject to the provision that
he will retransfer it to the mortgagor upon payment of the mortgage money as agreed’
 Essentials Features: (i) The mortgagor binds himself personally to repay the mortgage-
money on a certain date, in spite of the absolute transfer of property
 (ii) There is an absolute transfer of the property in favour of the mortgagee
 (iii) The transfer is subject to a condition that the mortgagee will re-transfer it to the
mortgagor upon payment of the mortgage- money

Slide 113: MORTGAGE BY DEPOSIT OF TITLE DEEDS

 According to Sec
 58(f) of the Transfer of Property’ Act, - ‘Where a person in any of the following towns -
namely, the towns of Kolkata, Chennai and Mumbai and in any other town which the
State Government concerned may, by notification in the official gazette, specify in this
behalf - delivers to a creditor or his agent documents of title to immoveable property,
with intent to create a security thereon, the transaction is called a mortgage by deposit
of title deeds
 ’ Essentials Features: (i) The mortgagor delivers to a creditor or his agent the
documents of title to the immoveable property
 (ii) With intent to create a security thereon
 (iii) The delivery of documents of title is done in a town specified by the State
Government

Slide 114: ANOMALOUS MORTGAGE

 According to Sec
 58(g) of the Transfer of Property Act ’a mortgage which is not a simple mortgage, a
mortgage by conditional sale and usufructuary mortgage and English mortgage or a
mortgage by deposit of title deeds within the meaning of this Section, is called an
‘Anomalous Mortgage
 ’ (a) Essentials Features: (i) It must be a mortgage as defined by Sec
 58 of the Transfer of Property Act
 (ii) It is negatively defined; and should not be anyone of the mortgages listed above

Slide 115: PRIORITY OF MORTGAGE

 As per Section 48 of Transfer of Property Act, 1882, the mortgage created first in point
of time gets priority As per Section 47 of Registration Act, 1908, a registered document
operates, not from the date of its registration but from the time of its execution
 Hence a document executed earlier, though registered later than another, has priority
over the documents executed later
 Prior mortgage by deposit of title deeds is not affected by subsequent registered
mortgage

Slide 116: LIMITATION PERIOD OF MORTGAGE

 For filing suit for recovery of mortgaged debt and sale of mortgaged property in the
event of non-payment of mortgaged debt - 12 years from the date when the mortgage
money sued for becomes due For filing a suit for foreclosure - 30 years from the date the
money secured by mortgage becomes due
 Foreclosure is the legal process by which a lender attempts to recover the amount owed
on a defaulted loan by taking ownership of the mortgaged property and selling it

 Slide 119: LAWS RELATING TO SECURITIES AND MODES OF CHARGE - II

Slide 120: PLEDGE

 Pledge means bailment of goods for purpose of providing security for payment of debt
or performance of promise Defined in Section 172 of Contract Act, 1872 Borrower is
Pawnor and the Banker is Pawnee Ownership is retained with Customer and Possession
is with the Banker The possession may be actual or constructive Under constructive
possession no physical transfer of goods from the custody of the pawnor Pledge can be
created in respect of existing goods which are in the possession of the pawnor Since
delivery is involved, goods must be specific and identified Pledge is lost, when
possession of goods lost

Slide 121: PLEDGE

 Pawnee may release the goods after getting a letter of trust from pawnor (trust receipt)
 Even the official receiver cannot claim the goods under trust No other creditor can take
away the goods pledged (Bank of Bihar vs State of Bihar and Other (1971) Pledge can
be created by Owner of goods, Mercantile agents, A pawnee can repledge the goods
pledged to him

Slide 122: DELIVERY OF GOODS

 As envisaged in Sale of Goods Act, 1930 By handing over the key of the godown in which
the goods are kept Good are in public warehouse, acknowledge by the warehouse
keeper who hold the goods thereafter, on behalf of the pawnee (attornment) Handing
over the document of title to goods viz
 Railway Receipt, Bill of Lading, Warehouse Receipts etc Good possessed by the pawnor
who acknowledges that he hold the goods on behalf of the pawnee (similar to
attornment)

Slide 123: RIGHTS OF PAWNEE

 Right to Retainer : Right to retain the pledge goods until the debt and charges are fully
settled Right to claim extra-ordinary expenses : for taking care of pledged goods No
right to retain in respect of other debts Right against third parties : the pawnee
has the same remedies against third persons, as the owner himself
 Right to retain, sue the pawnor and sell the pledged goods after giving reasonable
notice Any surplus upon sale of pledged goods, to be handed over to the pawnor

Slide 124: DUTIES OF THE PAWNOR

 Must disclose any material defect to pawnee before effecting pledge Otherwise he has to
compensate the damages suffered by the pawnee Pawnor must reimburse expenses
incurred by pawnee for safe keeping / preservation of pledged goods If the sale
 proceeds are not sufficient to adjust the dues, he is liable to make good the balance
There is an implied condition that the pawnor is having title to the goods pledged

Slide 125: HYPOTHECATION

 A charge on any movable property There is no transfer of interest but the borrower is
having an obligation to pay Thus an equitable charge is created in favour of the Lender
Debt existing or future (eg standing and future crops) Defined in SARFASI Act 2002
Section 2 (n) Without delivery of possession (compare pledge) This facility is offered to
respectable customers only Since the possession is with the borrower, otherwise, it is
risky Hence normally granted to customers with undoubted integrity Less risk when
created by a Company, since the charge is created with ROC Borrower is asked to
submit stock statements in respect Cash Credit advances

Slide 126: HYPOTHECATION

 The stock statement should contain only paid stocks The borrower is permitted to avail
the limit sanctioned based on drawing power Drawing power is arrived at with
reference to the stock of goods (paid stocks) and receivables Vehicles are hypothecated
to bank in vehicle finance
 Periodical inspections of security covered under hypothecation required It is floating
charge on the assets financed Become a fixed charge upon recalling the advance The
security shall be a continuing security (eg even CC in credit balance) Underlying agreed
is “Deed of Hypothecation” (requires stamping) Hypothecated assets are insured against
possible risks

Slide 127: HYPOTHECATION

 When a loan is to be raised against work-in-progress When the asset is movable When it
requires frequent and constant handling (RM) When the security is stock-in-trade The
security remain in borrower’s possession The creditor’s control over the security is
almost negligible
 Chances of borrower sells the goods hypothecated to bank and adjust other creditors
This will result in erosion of security charged to the banker Chances of hypothecating
same security to more than one banker At the time of realization of security (account is
in stress) the quality of goods or securities available may be inferior one

Slide 128: ASSIGNMENT

 The term assignment means the process by which a person called the assignor prefers
to transfer rights or benefits to another person called the assignee
 Mr A buys a life policy on his own life and assigns the same in favour of your Bank for
getting a loan
 If A dies, the bank is entitled to receive the amount of the policy and to sue on it Sec 131
: Every notice of transfer of an actionable claim shall be in writing should be signed by
the transferor, and, if he refuses to sign, then signed by the transferee
 It should contain the name and address of the transferee
Slide 129: ASSIGNMENT
 Is an Actionable Claim (enforceable in a court of law) Actionable claim is defined in Sec
3 of Transfer of Property Act, 1882 ( a claim to any debit other than a debt secured by…
 ) Parties Assignor and Assignee Assignment must be in writing Assignor cannot give a
better title than he has LIC Policy is normally assigned in favour of the Bank for availing
loan against such Policy In receivables finance, the receivables are assigned

Slide 130: BANKER’S LIEN

 The right of the banker to retain possession of security till the debt is discharged
 Banker’s Lien is General Lien
 Applied to general balance of payment (sec 171, ICA, 1872) Can sell after serving
reasonable notice
 Can be exercised against the customer only Not applicable in the case of safe custody,
articles left by mistake; debts not matured, articles deposited for specific purpose;
stolen goods
 General Lien (Section 171) : the right available till all amounts due from the debtor are
paid or discharges

Slide 131: BANKER’S LIEN

 Right to retain possession of goods/securities (except actionable claims/money) Right
to sell which came into possession in the ordinary course of banking business Goods or
securities inadvertently left by customers not covered The right can be exercised only
when the securities are given to the Banker in the normal course of banking business to
cover a debt Banker’s lien is a general lien (Sec 171 of contract Act 1872) Particular Lien
is the right to retain goods in respect of which the debt was incurred Banker’s lien is an
implied pledge No specific agreement is required for creating a right of lien When a
customer inadvertently leaves a packet containing certain share certificates, life
insurance policies, fixed deposit receipts of other banks etc
 , while leaving the bank premises, the banker will have no right of lien over those
securities because those were not given to the banker in the normal course of banking
business

Slide 132: RIGHT OF SET OFF

 Debtor – Creditor relationship should exist (not applicable in safe custody, locker etc)
After serving reasonable notice Same right and same capacity Sole proprietor and his
individual account, the said right can be exercised Debts should be due for payment at
the time of exercising right of set off Automatic set off (death, insanity, insolvency,
Garnishee Order, AO etc

) Guarantor's account can be set off against the borrower’s

dues only if the guarantee amount is determined
Slide 136: DEFINITION OF CHARGE
 As per section 2 (16) of Companies Act, 2013 a charge means “an interest or lien created
on the property or assets of a company or any of its undertaking or both, as security,
and includes a mortgage” It is mandatory for every company to register the charges
with the Registrar of Companies Such registration provides a public notice on how far
the property of the company is encumbered
 all types of charges to be registered with ROC, within the stipulated period, irrespective
of whether the charge is created Within or outside India On its property or assets or any
of its undertakings Whether tangible or otherwise Whether fixed or floating Situated in
or outside India

Slide 137: FIXED AND FLOATING CHARGE

 Fixed charge means specific charge which extends over a specific property or
properties of the company
 Here the underlying security is a particular or specific property
 Floating charge means a charge that is general and not specific
 It can be said to be a charge that floats over the present and future property of the
company, that doesn’t restrict the company from assigning or sale; that on happening of
an event or contingency, crystallizes as a fixed charge

Slide 138: PROCEDURE FOR REGISTRATION OF CHARGE

 Section 77 to 87 Companies Act 2013 provides for registration of charges Section
77(1) Charges to be registered within 30 days of creation Additional 30 days (enhanced
fees) Additional 60 days thereafter (at ad-valorem fees) ( as per Companies (Reg of
charges) amendment Rules 2019) Present modification of 120 days came into effect
from 02.11.2018
 Prior to that it was 300 days

Slide 139: Creation and modification of charge

 1 Creation and Modification of Charges Form CHG-1: Used for registering the creation or
modification of charges on any property or assets, excluding those related to debentures
 Form CHG-9: Used specifically for the creation or modification of charges related to
debentures
 2 Certificates Issued by the ROC Upon successful filing and verification, the Registrar
issues official certificates: Form CHG-2: The Certificate of Registration issued after a
charge is successfully created

Slide 140: Creation and modification of charge

 Special Circumstances & Registers Form CHG-6: Used for intimating the appointment or
cessation of a receiver or manager for the secured assets
 Form CHG-7: Not an e-form; this is the physical or digital Register of Charges
maintained internally by the company at its registered office
 Form CHG-8: Used as an application to the Central Government to condone a delay in
filing for the registration, modification, or satisfaction of a charge

Slide 141: EFFECT OF REGISTRATION

 When a charge is registered with ROC, the first holder will get the priority in the
charged assets/properties
 The date of registration of charge is important for considering priority
 If charge is not registered, the liquidator appointed under this Act, or the IBC, 2016 or
any other creditor will take possession of the assets for the purpose of liquidation
 Hence the concerned creditor will be treated as unsecured creditor
 Section 78: In case the charge is not registered by the company the charge holder can
register within 14 days after giving notice to the company Section 82 & 83 : Company to
report satisfaction of charge within 30 days from the date of the payment of satisfaction
of full charge