RBI Act, 1934 / Chapters IIIE and IV

Sections 45-Y and 46 RBI Act, 1934 - Joint Mechanism and Reserve Fund

Sections 45-Y and 46 of the Reserve Bank of India Act, 1934 address two distinct matters: resolution of regulatory jurisdiction disputes over hybrid or composite financial instruments, and the Central Government's contribution of rupee securities to the Reserve Bank's Reserve Fund.

Section 45-Y - Joint Mechanism

Chapter IIIE of the Act provides a joint mechanism for a specific category of disagreements between financial-sector regulators. The section begins with a non-obstante clause, meaning that the specified referral mechanism applies notwithstanding conflicting provisions in the RBI Act, the Securities and Exchange Board of India Act, 1992 or another law in force, to the extent provided.

Sub-section (1): When the mechanism applies

It applies where a difference of opinion arises whether an instrument is a hybrid or composite instrument containing a money-market, securities-market, insurance or other specified component, and whether it falls within the jurisdiction of the RBI, SEBI, the insurance regulator or the pension regulator. The instruments covered by the section include:

Derivatives, money-market instruments, repos, reverse repos and securities described in clauses (a) to (e) of Section 45-U.
Life-insurance policies under the Insurance Act, 1938, and the specified classes of scrips and securities under Section 2(h) of the Securities Contracts (Regulation) Act, 1956.

For such a jurisdictional disagreement, the statute provides for referral to a Joint Committee. The committee is not a general appellate forum for all disputes between investors and financial institutions.

Statutory composition of the Joint Committee

Union Finance Minister - ex officio Chairperson;
Governor, Reserve Bank of India - ex officio Vice-Chairperson;
Secretary, Department of Economic Affairs, Ministry of Finance - ex officio Member;
Secretary, Department of Financial Services, Ministry of Finance - ex officio Member;
Chairperson, Insurance Regulatory and Development Authority - ex officio Member;
Chairman, Securities and Exchange Board of India - ex officio Member;
Chairperson, Pension Fund Regulatory and Development Authority - ex officio Member.

The Act's wording includes historical references to the insurance and pension regulators. Current institutional names and their governing statutes should be read alongside the operative amendments and notifications, including the Insurance Regulatory and Development Authority of India and the Pension Fund Regulatory and Development Authority.

How the Joint Committee works: Sections 45-Y(2) to (5)

Sub-section (2): Convener

The Secretary, Department of Financial Services, Ministry of Finance, is the convener of the Joint Committee's meetings.

Sub-section (3): Who may refer a disagreement?

The RBI Governor, insurance regulator's Chairperson, SEBI Chairman or pension regulator's Chairperson - the members identified in clauses (b), (e), (f) and (g) of sub-section (1) - may refer a qualifying difference of opinion to the committee.

Sub-section (4): Procedure and deadline

The committee may follow the procedure it considers expedient and must give its decision to the Central Government within three months of the reference under sub-section (3).

Sub-section (5): Binding effect

The committee's decision binds the RBI, SEBI, insurance regulator and pension regulator. This provision is directed at regulatory allocation of responsibility, rather than adjudication of an individual investment claim.

Section 46 - Contribution by Central Government to the Reserve Fund

The Central Government shall transfer to the Bank rupee securities of the value of five crores of rupees to be allocated by the Bank to the Reserve Fund.

Meaning and purpose

Section 46 creates a statutory obligation for a transfer of rupee securities worth Rs. 5 crore from the Central Government to the Reserve Bank, to be allocated to its Reserve Fund. The provision concerns the Bank's reserve capital structure; it is not a recurring grant of Rs. 5 crore every financial year, nor is it a deposit guarantee for bank customers. The text should be distinguished from provisions concerning allocation of RBI surplus profits and other specifically constituted funds.

Definitions and related provisions

Derivative: Under Section 45-U(a), broadly an instrument for future settlement whose value depends on changes in specified underlying factors, including interest rates, foreign exchange rates, credit ratings or indexes and securities prices, and prescribed instruments.

Money-market instrument: Section 45-U(b) includes call or notice money, term money, repo, reverse repo, certificates of deposit, commercial paper and specified short-maturity debt instruments.

Repo and reverse repo: Defined in Sections 45-U(c) and (d) as securities transactions coupled with an agreement to repurchase or resell on a future date at an agreed price, reflecting borrowing or lending respectively.

Regulatory jurisdiction: The legal authority of a regulator over an instrument or activity. Section 45-Y addresses overlapping claims concerning certain hybrid or composite instruments; it does not transfer all financial regulation to the Joint Committee.

Official legal and regulatory sources

For a specific transaction or dispute, consult the current statutory text, rules, notifications and applicable directions issued by the competent regulator.