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      Question

      Section 20A of the Banking Regulation Act, 1949

      restricts the power of a banking company to remit debts. Under this section, a banking company shall not, except with the prior approval of the Reserve Bank, remit in whole or in part any debt due to it by its directors or connected persons. What is the legal consequence of a remission made in contravention of this provision?
      A The remission is valid but the banking company is liable to a penalty equal to the remitted amount Correct Answer Incorrect Answer
      B The remission is voidable at the option of the Reserve Bank within three years Correct Answer Incorrect Answer
      C The remission attracts criminal liability for the directors under Section 46 Correct Answer Incorrect Answer
      D The remission must be ratified by the shareholders within six months or it becomes void Correct Answer Incorrect Answer
      E The remission is void and of no effect Correct Answer Incorrect Answer

      Solution

      Section 20A(2), inserted by the Banking Laws (Miscellaneous Provisions) Act, 1963 (Act 55 of 1963) with effect from 1 February 1964, provides that any remission made in contravention of sub-section (1) shall be void and of no effect. Sub-section (1) bars a banking company from remitting, without the Reserve Bank’s prior approval, any debt owed to it by any of its directors, any firm or company in which a director is interested as director, partner, managing agent or guarantor, or any individual for whom a director is a partner or guarantor. The provision complements Section 20, which prohibits loans secured on the bank’s own shares and restricts loans to directors. Together, Sections 20 and 20A form a comprehensive framework preventing a bank from channelling benefits to its insider directors.

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