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The Special Leave Petition filed by Bank of Baroda with the Supreme Court was dismissed and the apex court upheld the Calcutta High Court's February order that asked the RBI to consider revoking the bank's license for failing to honor Simplex Projects' unconditional bank guarantee given to Indian Oil Corporation.
The Calcutta High Court had earlier asked the RBI to consider “appropriate steps” against Bank of Baroda, including cancelling its banking license, for delaying to honor a bank guarantee. The High Court order said: “Considering the conduct of the appellants, the Reserve Bank of India should consider what appropriate steps may be taken against the Bank of Baroda, including revoking its license or the authority to carry on banking business, if necessary.”
Section 22(4) of the Banking Regulation Act discusses cancellation of banking license. As per this section, the RBI may cancel a license granted to a banking company: if the company ceases to carry on banking business in India; if the company at any time fails to comply with any of the conditions imposed upon it under sub-section (1); or if at any time, any of the conditions referred to in sub-section (3) is not fulfilled.
It is doubtful whether a banking license can be cancelled for failure to honour a bank guarantee as per this section. Section 38 of the Banking Regulation Act discusses winding up of banks. Winding up of a bank must arise only when the bank is unable to pay its debts.
The bank has got a deposit of more than ?8 lakh crore and advance of ?5 lakh crore. Government of India’s shareholding is 71.60 per cent in the bank. If the banking licence is cancelled the repercussion will be enormous.
At the end of case, the Bank of Baroda case, the calcutta High Court order asking the RBI to consider revoking the Bank of Baroda's licence for failure to honour a bank guarantee.
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