Sections 14 and 14A of the Banking Regulation Act, 1949: Charge on Unpaid Capital and Floating Charge on Assets
Sections 14 and 14A of the Banking Regulation Act, 1949 place important restrictions on the creation of charges by banking companies. Section 14 makes a charge on the unpaid capital of a banking company invalid. Section 14A separately restricts a banking company from creating a floating charge over its undertaking or property unless the Reserve Bank of India certifies in writing that the proposed charge is not detrimental to the interests of depositors.
- A banking company cannot create a valid charge over its unpaid capital.
- A floating charge over the undertaking or property of a banking company requires prior written certification from the Reserve Bank of India.
- A floating charge created without the required RBI certificate is invalid.
- Refusal of the certificate may be appealed to the Central Government within ninety days from communication of the refusal.
Section 14: Prohibition of charge on unpaid capital
Statutory text: No banking company shall create any charge upon any unpaid capital of the company, and any such charge shall be invalid.
Meaning and effect of Section 14
Section 14 protects the capital structure of a banking company by preventing unpaid share capital from being used as security for a debt or other obligation. If a banking company purports to create such a charge, the Act declares the charge invalid.
For this purpose, unpaid capital may be understood as the portion of subscribed share capital that shareholders are liable to pay but that has not yet been called up or paid. A charge generally refers to a security interest created over property or an asset to secure payment or performance of an obligation. These explanations are provided for general understanding; the statutory rule is the prohibition contained in Section 14 itself.
Section 14A: Prohibition of floating charge on assets
Section 14A(1): Notwithstanding anything contained in section 6, no banking company shall create a floating charge on the undertaking or any property of the company or any part thereof, unless the creation of such floating charge is certified in writing by the Reserve Bank as not being detrimental to the interests of the depositors of such company.
Section 14A(2): Any such charge created without obtaining the certificate of the Reserve Bank shall be invalid.
Section 14A(3): Any banking company aggrieved by the refusal of a certificate under sub-section (1) may, within ninety days from the date on which such refusal is communicated to it, appeal to the Central Government.
Section 14A(4): The decision of the Central Government where an appeal has been preferred to it under sub-section (3), or of the Reserve Bank where no such appeal has been preferred, shall be final.
What is a floating charge?
A floating charge is a form of security that may extend over a changing class of assets of a business rather than being permanently fixed to one identified asset at the time of creation. In the banking context, Section 14A subjects such a charge over the undertaking or property of a banking company to RBI scrutiny because of the potential effect on the asset pool available to meet depositor and other claims.
RBI certificate under Section 14A
The restriction in Section 14A begins with a non-obstante clause overriding Section 6 to the extent necessary. Even though Section 6 identifies forms of business in which banking companies may engage, a banking company cannot create the floating charge described in Section 14A unless the Reserve Bank certifies in writing that creation of the charge is not detrimental to depositors.
The certificate is therefore a statutory precondition. Under sub-section (2), a floating charge created without obtaining the RBI certificate is invalid.
Appeal against refusal of RBI certificate
If the Reserve Bank refuses to grant the certificate, the banking company may appeal to the Central Government. The appeal must be made within ninety days from the date on which the refusal is communicated to the banking company. If an appeal is filed, the Central Government's decision is final. If no appeal is filed, the Reserve Bank's decision is final.
| Provision | Subject | Legal effect |
|---|---|---|
| Section 14 | Charge on unpaid capital | A banking company cannot create such a charge; any such charge is invalid. |
| Section 14A(1) | Floating charge on undertaking or property | Requires written RBI certification that the charge is not detrimental to depositors. |
| Section 14A(2) | Charge without RBI certificate | The charge is invalid. |
| Section 14A(3) | Appeal against RBI refusal | Appeal lies to the Central Government within ninety days of communication. |
| Section 14A(4) | Finality | Central Government decision on appeal, or RBI decision where no appeal is filed, is final. |
Relationship with Section 6 of the Banking Regulation Act
Section 14A expressly operates notwithstanding Section 6. This means that the forms of business permitted to a banking company under Section 6 do not dispense with the separate statutory requirement for RBI certification where the proposed transaction amounts to a floating charge covered by Section 14A.
Legislative history of Section 14A
Section 14A was inserted by the Banking Companies (Amendment) Act, 1959 (Act 33 of 1959), section 9, with effect from 1 October 1959.
For authoritative statutory text and subsequent amendments, users should verify the current version of the Banking Regulation Act, 1949 on India Code and consult applicable RBI directions, circulars or approvals where a particular banking transaction is involved.
Frequently asked questions
Can a banking company create a charge on its unpaid capital?
No. Section 14 expressly prohibits a banking company from creating a charge on its unpaid capital and states that any such charge is invalid.
Can a banking company create a floating charge over its assets?
Yes, but only where the requirements of Section 14A are satisfied. The banking company must obtain written certification from the Reserve Bank that creation of the floating charge is not detrimental to the interests of depositors.
What happens if the RBI certificate is not obtained?
Under Section 14A(2), a floating charge created without obtaining the required Reserve Bank certificate is invalid.
Is there an appeal if RBI refuses the certificate?
Yes. The banking company may appeal to the Central Government within ninety days from the date on which the RBI refusal is communicated to it.