PAYMENT OF COMPENSATIONCentral
Section 6 of The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970
- (1)Every existing bank shall be given by the Central Government such compensation in respect of the transfer, under section 4, to the corresponding new bank of the undertaking of the existing bank as is specified against each such bank in the Second Schedule.
- (2)The amount of compensation referred to in sub-section (1) shall be given to every existing bank, at its option,--
- (a)in case (to be paid by cheque drawn on the Reserve Bank) in three equal annual instalments, the amount of each instalment carrying interest at the rate of four per cent. per annum from the commencement of this Act, or
- (b)in saleable or otherwise transferable promissory notes or stock certificates of the Central Government issued and repayable at par, and maturing at the end of--
- (i)ten years from the commencement of this Act and carrying interest from such commencement at the rate of four and a half per cent. per annum, or
- (ii)thirty years from the commencement of this Act and carrying interest from such commencement at the rate of five and a half per cent. per annum, or
- (c)partly in cash (to be paid by cheque drawn on the Reserve Bank) and partly in such number of securities specified in sub-clause (i) or sub-clause (ii), or both, of clause (b), as may be required by the existing bank, or
- (d)partly in such number of securities specified in sub-clause (i) of clause (b) and partly in such number of securities specified in sub-clause (ii) of that clause, as may be required by the existing bank.
- (3)The first of the three equal annual instalments referred to in clause (a) of sub-section (2) shall be paid, and the securities referred to in clause (b) of that sub-section shall be issued, within sixty days from the date of receipt by the Central Government of the option referred to in that sub-section, or where no such option has been exercised, from the latest date before which such option ought to have been exercised.
- (4)The option referred to in sub-section (2) shall be exercised by every existing bank before the expiry of a period of three months from the appointed day (or within such further time, not exceeding three months, as the Central Government may, on the application of the existing bank, allow) and the option so exercised shall be final and shall not be altered or rescinded after it has been exercised.
- (5)Any existing bank which omits or fails to exercise the option referred to in sub-section (2), within the time specified in sub-section (4), shall be deemed to have opted for payment in securities specified in sub-clause (i) of clause (b) of sub-section (2).
- (6)Notwithstanding anything contained in this section, any existing bank may, before the expiry of three months from the appointed day (or within such further time, not exceeding three months, as the Central Government may, on the application of the existing bank, allow) make an application in writing to the Central Government for an interim payment of an amount equal to seventy-five per cent. of the amount of the paid-up capital of such bank, as on the commencement of this Act, indicating therein whether the payment is desired in cash or in securities specified in sub-section (2), or in both.
- (7)The Central Government shall, within sixty days from the receipt of the application referred to in sub-section (6), make the interim payment to the existing bank in accordance with the option indicated in such application.
- (8)The interim payment made to an existing bank under sub-section (7) shall be set off against the total amount of compensation payable to such existing bank under this Act and the balance of the compensation remaining outstanding after such payment shall be given to the existing bank in accordance with the option exercised, or deemed to have been exercised, under sub-section (4) or sub-section (5), as the case may be: Provided that where any part of the interim payment is obtained by an existing bank in cash, the payment so obtained shall be set off, in the first instance, against the first instalment of the cash payment referred in sub-section (2), and in case the payment so obtained exceeds the amount of the first instalment, the excess amount shall be adjusted against the second instalment and the balance of such excess amount, if any, against the third instalment of the cash payment.
- (9)Any payment purported to have been made to an existing bank under sub-section (3) of section 15 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969 (22 of 1969), shall be deducted by the Central Government from the amount of the interim payment made to such existing bank under sub-section (7), or where no such interim payment has been made, from the total amount of the compensation due to such existing bank, and the amount so deducted shall be paid by the Central Government to the corresponding new bank.
Summary
- The Central Government pays compensation to the old banks as listed in the Second Schedule.
- Banks can choose to be paid entirely in cash over three years with four percent interest.
- Alternatively, banks can choose government securities maturing in ten years or thirty years, or a mix of cash and securities.
- A bank must pick its payment method within three months, and this choice cannot be changed.
- If a bank misses the deadline to choose, it automatically receives ten-year government securities.
- Banks can request an early cash advance of up to seventy-five percent of their paid-up capital, which is later subtracted from their total compensation.
Practical examples
1The directors of an old bank meet in March 1970. They decide they need immediate money, so they apply to the Central Government for an interim payment of seventy-five percent of their paid-up capital. They receive this early payment within sixty days.
2Another old bank completely forgets to fill out the compensation paperwork before the three month deadline passes. Because they missed the deadline, the government automatically issues them securities that mature in ten years at four and a half percent interest.
FAQ
1. How much compensation does each bank get?
The exact amount for each bank is specified in the Second Schedule of the Act.
2. Can a bank change its mind about how it wants to be paid?
No, once a bank makes its choice within the three month window, the decision is final and cannot be altered or rescinded.
3. What happens if a bank chooses cash?
Cash payments are made by a cheque drawn on the Reserve Bank in three equal annual instalments, plus four percent interest per year.
Test yourself
Q1.Under Section 6 of The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, what happens if an existing bank fails to exercise its option for how to receive compensation within the allowed time limit?
Q2.Under Section 4 of The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, a bank's business is transferred to a new bank. Under Section 6 of the same Act, what is the maximum amount an existing bank can request as an interim compensation payment while waiting for the full settlement?
Q3.Under Section 6 of The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, if an existing bank chooses to receive its compensation entirely in cash, how is this cash paid?
Q4.Under Section 6 of The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, a prior payment might be deducted from the bank's compensation. Which specific law is named as the source of this potential prior payment?