The State Bank of India Act: An Overview

With increasing financial transactions and requirements of easy banking system, and also to regulate the commercial banking system, parliament has legislated the State Bank of India Act. As result of this, the State Bank of India established On July 1, 1955.

What does the State Bank of India Act Define?

The State Bank of India is the biggest and oldest commercial bank in the country, which came into existence after the nationalisation of the Imperial Bank of India in 1955. The Imperial Bank of India was the central bank of British India and the government took control of it in 1955 and renamed it the State Bank of India by passing the State Bank of India Act, 1955.

The Act received the President's assent on May 8th, 1955, and it came into force on July 1st, 1955. The Act is divided into 57 sections, which are contained in 8 chapters and 2 schedules. It originally had four schedules, but two were repealed in 1960.

Establishment of the State Bank of India

Section 3 of the Act provides for the establishment of a State Bank of India to carry on the business of banking and other businesses and for the purpose of taking over the Imperial Bank of India.

Share Capital

Share capital is the capital raised by issuing shares at a given face value. Authorised Capital is the maximum amount of capital that a company has the power to issue during its lifetime, and the portion of authorised capital actually issued to the public is called issued capital.

The State Bank of India has an authorised capital of five thousand rupees and the Central Board has the power to reduce the face value of the shares and also to increase or decrease the authorised capital.

Transfer of Undertaking by the Imperial Bank

Earlier, the Imperial Bank performed all normal banking functions. When it got nationalized, the provisions for regulating the transfer of its assets, liabilities, employment, etc. were required. Sections 6 to 9 of the Act govern such transfers.

These sections contain provisions regarding the transfer of assets, liabilities, and encumbrances to the Reserve Bank. All rights, powers, authorities, privileges, property, investments, contracts, deeds, agreements, existing provident and other funds, etc. of the Imperial Bank are transferred to SBI. The sections also provide provisions for the transfer of service of existing officers and employees of Imperial Bank to the SBI.

Shares

The Central Government owns at least 51% of the SBI's issued capital. Section 11 imposes restrictions on the voting rights of shareholders other than the Central Government.

Central Board

Section 17 of the Act entrusts the general superintendence and direction of the affairs and business of the SBI to the Central Board. The Board exercises all powers and does all acts that may be exercised or done by the SBI. The Board shall perform its functions on principles having regard to the public interest.

The Board shall consist of the following −

• Both a Chairman and a Vice Chairman.

• Two Managing Directors are appointed by the Central Board.

• Six directors are elected by private shareholders.

• Eight directors are nominated by the Central Government in consultation with the RBI.

• One director nominated by the central government

• One director is nominated by RBI.

The term of office of the Chairperson and each Managing Director is not more than five years, and each member is eligible for reappointment. The term of office of a director is three years.

Local Board

Section 21 of the Act provides for the constitution of a local board at each place where the State Bank has its local head office. The Local Board exercises powers and performs duties and functions delegated to it by the Central Board. This local board will be made up of the following individuals −

• Chairman.

• Directors are nominated or elected by the Central Board.

• Six members are nominated by the Central Government.

• The Chief General Manager of the local head office.

Powers of the Central Board

The Central Board exercises the following powers as per the Act −

• The Central Board has the power to constitute an executive committee and other committees it deems fit in order to exercise its functions.

• The Board has the power to appoint officers and other employees or advisers for the efficient performance of its functions.

• It has the power to make regulations that are not inconsistent with the Act.

Decision-making by the Boards

As per Section 31, the meetings of the Central Board may be held in person, through videoconferencing, or any other electronic means. All questions decided at the meeting shall be decided by the majority vote of the directors present at the meeting. A director, directly or indirectly, interested in any contract, loan, arrangement, or proposal which is discussed at the meeting, shall not attend such meeting unless his presence is required for the purpose of eliciting information.

Similar provisions are contained in the Act regarding a Local Board under Section 31A.

Business of the State Bank

It includes −

• The State Bank shall act as an agent of the Reserve Bank of India for paying, receiving, collecting, and remitting money on behalf of the government. It undertakes and transacts other businesses which the RBI entrusts to it from time to time.

• The SBI has to function as a banker to the government. It collects money and makes payments on behalf of the government. It manages public debt, collects charges, and grants loans.

• SBI is considered a banker's bank as it receives deposits and provides financial assistance to commercial banks that have their accounts in SBI.

• It acts as a clearing house where RBI has no branch.

It may transact other banking business as is provided in the Banking Regulation Act, 1949.

Prohibited Functions

Section 34 prohibits SBI from transacting the following business −

• Other than its own offices, SBI shall not own or acquire any immovable property.

• SBI cannot grant loans against stocks and shares for a period above six months.

Conclusion

The State Bank of India Act passed solely with the purpose to constitute a State Bank for India, to transfer to it the undertaking of the Imperial Bank of India, and to provide for other matters connected therewith or incidental thereto. Furthermore, the opening of multiple branches of SBI in urban region and also in rural region made the financial transaction even for a private individual very easy.

Frequently Asked Questions

Q1. What was the State Bank of India called before it was created through the act?

Ans: Before the establishment of State Bank of India, the Imperial Bank was quite popular; however, after the enactment of SBI Act, the State Bank of India set up and Imperial Bank of India merged into it. The nationalization of the Imperial Bank ended the protracted debate on its role in independent India.

Q2. What are the main functions of State Bank of India?

Ans: Being a national bank, State Bank of India is a multinational bank, and it operates in dozens of foreign countries. So, the major functions of SBI are:

• It provides the option of opening savings and current accounts, as well as a personal locker for each individual.

• It enables the drawing, acceptance, buying, and selling of bills of exchange.

• It also issues and circulates the letters of credit.

• Recently, it started its own app (SBI Yono) to provide easy mobile banking.

• It also invests in funds or any special kind of security, etc.