The provision of Reserve fund is substituted by amendment of 1949 w.e.f  01/10/1959. Section 17 of the Banking Regulation Act,1949 deals with the reserve fund of Banking company and provide for the transfer, out of the profit of a banking company for a sum not less than 20% of such that it is Reserve fund subject to certain conditions. The provision requiring the building up and maintenance of Reserve fund are to be found in the banking laws of many countries such as Switzerland, USA (United States of America), Sweden, etc.

Reserve Fund (Section 17 of B.R.A ). 

(1) Every banking company incorporated in India shall create a reserve fund and shall, out of the balance of profit of each year as disclosed in the profit and loss account prepared under section 29 and before any dividend is declared, transfer to the reserve fund a sum equivalent to not less than twenty per cent of such profit.

(1A) Notwithstanding anything contained in sub-section (1), the Central Government may, on the recommendation of the Reserve Bank and having regard to the adequacy of the paid-up capital and reserves of a banking company in relation to its deposit liabilities, declare by order in writing that the provisions of sub-section (1) shall not apply to the banking company for such period as may be specified in the order: Provided that no such order shall be made unless, at the time it is made, the amount in the reserve fund under sub-section (1), together with the amount in the share premium account is not less than the paid-up capital of the banking company.

(2) Where a banking company appropriates any sum or sums from the reserve fund or the share premium account, it shall, within twenty-one days from the date of such appropriation, report the fact to the Reserve Bank, explaining the circumstances relating to such appropriation: Provided that the Reserve Bank may, in any particular case, extend the said period of twenty-one days by such period as it thinks fit or condone any delay in the making of such report.

 Relevant case law -

 Indian Overseas Bank Vs IT Commr. Madras AIR 1970 SC 1530

           In this case, the Supreme Court held that the Reserve contemplated by the Banking Companies Act is a separate reserve and cannot be utilized for business purposes. The reserve contemplated in section 10(2) (vi-b) of the Income Tax Act is an independent reserve and the two reserves are different.

See also...

1. Maintenance of a percentage of assets (Section 24) | Banking Regulation Act, 1949

2. Restrictions on loans and advances (Section 20) | Banking Regulation Act, 1949

3. Forms of Business of Banking Companies | Banking Law

4. Audit (Section 30) under the Banking Regulation Act 1949

5. Distinction/Difference between shareholders and debenture holders


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