Banks conceal their ‘limited liability' status

It was in 1969 that 14 banks were ‘nationalised'. Although the Congress Government called it nationalisation, the great Rajaji referred to it as ‘Governmentalisation'.

Immediately after this, all nationalised banks did one common thing. They removed the words ‘The' and ‘Limited' from their name boards. Either they had black painted over these words, or pasted paper over them. They also altered their stationery items accordingly.

The idea behind removal of the word ‘Limited' is that these banks are no more limited liability companies and their liability is unlimited, as the Government has become the owner.

After more than four decades, what is happening now? The Reserve Bank of India has granted new licences for private banks.

All of them are public limited companies constituted under the Companies Act, 1956. Their shares are quoted and traded in the market.

Most of these banks use their names without the word ‘Limited'. Their branch name board, ATMs, Web site, advertisement and publicity material, or account opening forms, do not contain the word ‘Limited'.

However their agreement forms and loan documents have the word ‘Limited'. This is perhaps because the documents may otherwise not be admissible in a court of law.

Is it correct on their part to drop the word ‘Limited'?

Any company registered under Companies Act, 1956, is supposed to use its name only as provided in the licence. No doubt, these new private banks have been provided licences only as public limited companies.

WHAT THE LAW SAYS

Section 147 provides that every company shall paint or affix its name (and the address of its registered office), and keep the same painted or affixed, on the outside of every office or place in which its business is carried on…in letters easily legible…; shall have its name engraved in legible characters on its seal; and shall have it mentioned in legible characters in all its business letters, bill heads, letter paper, and other official publications; in all bills of exchange, in hundies, promissory notes, endorsements, cheques and orders for money or goods purporting to be signed by or on behalf of the company…

Hence it is obligatory for these banks to use the word “Limited”.

Not only that, the section further stipulates penal action for failure as follows: “If a company does not paint or affix its name, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to Rs 500 for not so painting or affixing its name and the address of its registered office, and for every day during which its name and the address of its registered office], is not so kept painted or affixed.

If a company fails to comply with even this, it shall be punishable with fine which may extend to Rs 5,000.

There is also a provision to exempt the company from the usage of ‘Limited'. Section 25 of the Companies Act spells out the circumstance: Where it is proved to the satisfaction of the Central Government that an

association is about to be formed as a limited company for promoting commerce, art, science, religion, charity or any other useful object, and

intends to apply its profits, if any, or other income in promoting its objects, and prohibits the payment of any dividend to its members, the Central Government may direct that the association may be registered as a company with limited liability, without the addition to its name of the word “Limited” or “Private Limited”.

These private banks do not seem to have obtained any such exemption and they are also not charitable companies/trusts.

MISLEADING THE PUBLIC

It will not be out of place to refer to Section 68, though it deals with investment as shares/debentures.

Any person who either knowingly or recklessly makes any statement, promise or forecast which is false, deceptive or misleading or by any dishonest concealment of material facts…shall be punishable with imprisonment for a term which may extend to five years, or with fine which may extend to Rs 100,000, or with both.

The question that arises, then, is how and why these banks have been allowed to go scot-free. Banks receive deposits from the public, and it is on the basis of trust that people deposit money. Making a statement which is contrary to fact can be interpreted as deceiving the public.

Of late, old generation private banks have been dropping the word ‘Limited' from their name boards and other publicity material.

If these banks indeed have unlimited liability, who will foot the bill in the event of liquidation?

(The author is a retired banker.)

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