Section 17 of the Banking Regulation Act, 1949: Reserve Fund
Section 17 requires every banking company incorporated in India to create a reserve fund and, subject to the statutory exception in sub-section (1A), transfer at least 20% of its annual profit to that fund before declaring any dividend.
- A banking company incorporated in India must create a reserve fund.
- At least 20% of each year's profit, as disclosed in the profit and loss account prepared under Section 29, must ordinarily be transferred to the reserve fund before dividend declaration.
- The Central Government may, on the recommendation of the Reserve Bank of India, grant a written exemption for a specified period if the statutory capital and reserve conditions are satisfied.
- If money is appropriated from the reserve fund or share premium account, the banking company must report the appropriation to RBI within 21 days, subject to RBI's power to extend the period or condone delay.
What Section 17 means
The object of Section 17 is to strengthen the financial base of banking companies by requiring a portion of annual profits to be retained as reserves rather than being fully distributed as dividend. The provision is linked to the profit and loss account prepared under Section 29 of the Act.
Section 17 - Statutory text
Section 17(1). Every banking company incorporated in India shall create a reserve fund and shall, out of the balance of profit of each year as disclosed in the 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.
Section 17(1A). Notwithstanding anything contained in sub-section (1), the Central Government may, on the recommendation of the Reserve Bank and having regard to the adequacy of the paid-up capital and reserves of a banking company in relation to its deposit liabilities, declare by order in writing that the provisions of sub-section (1) shall not apply to the banking company for such period as may be specified in the order.
Proviso to Section 17(1A). No such order shall be made unless, at the time it is made, the amount in the reserve fund under sub-section (1), together with the amount in the share premium account, is not less than the paid-up capital of the banking company.
Section 17(2). Where a banking company appropriates any sum or sums from the reserve fund or the share premium account, it shall, within twenty-one days from the date of such appropriation, report the fact to the Reserve Bank, explaining the circumstances relating to such appropriation.
Proviso to Section 17(2). The Reserve Bank may, in any particular case, extend the said period of twenty-one days by such period as it thinks fit or condone any delay in the making of such report.
Explanation of the main requirements
1. Creation of reserve fund
The obligation applies to every banking company incorporated in India. The reserve fund is a statutory reserve maintained under the Banking Regulation Act, 1949.
2. Minimum transfer of 20% of annual profit
The transfer must be made out of the balance of profit for the year as disclosed in the profit and loss account prepared under Section 29. The statutory minimum is 20% of that profit, and the transfer must take place before any dividend is declared.
3. Exemption under Section 17(1A)
Section 17(1A) begins with a non-obstante clause. It permits the Central Government, on RBI's recommendation, to suspend the operation of Section 17(1) for a specified period. The power is conditional and may be exercised only where the statutory test concerning paid-up capital, reserve fund and share premium account is satisfied.
4. Reporting appropriation from reserves
If a banking company uses or appropriates any amount from the reserve fund or the share premium account, it must report the fact and the surrounding circumstances to RBI within 21 days. RBI may extend the time or condone delay in an appropriate case.
Legislative notes
Certain words in Section 17(1) were omitted by Act 36 of 1962 with effect from 16 September 1962. Sub-section (1A) was inserted by the same amending Act with effect from 16 September 1962.
Related provisions
For connected reserve, liquidity and accounts provisions, see Section 18 - Cash Reserve, Section 24 - Maintenance of a Percentage of Assets, and Section 29 - Accounts and Balance Sheet.