1993 (2) TMI 320 - SC - Companies Law

Constitutional validity of Chapter 111-C read with section 58B (5A) of the Reserve Bank of India Act, 1934, introduced by the Banking Laws (Amendment) Act, 1983 challenged Held that - No doubt, the impugned legislation places restrictions on the right of the appellants to carry on business, but what is essential is to safeguard the rights of various depositors and to see that they are not preyed upon. From the earlier narration, it would be clear that the Reserve Bank of India, right from 1966, has been monitoring and following the functioning of non-banking financial institutions which invite deposits and then utilise those deposits either for trade or for other various industries. A ceiling for acceptance of deposits and to require maintenance of certain liquidity of funds as well as not to exceed borrowings beyond a particular percentage of the netowned funds have been provided in the corporate sector. But for these requirements, the depositors would be left high and dry without any remedy. Even the corporate sector was not free from blame. It had done damage to the economy and brought ruination to small depositors. This was why Section 58A in the Companies Act of 1956 came to be introduced. It cannot be contended that suddenly the companies like the appellant and the petitioners arc called upon to reduce deposits. Even otherwise, the interests of the depositors is the prime concern. Unquestionably, Rule 3A is to deposit 10% of the deposits maturing during the year in the manner prescribed in Rule 3. Some deposits would be maturing between April 1, 1978 and March 31, 1979. To provide for such marginal situation, a proviso is inserted. Does it to make the rule retroactive? Of course, not. Appeal dismissed

Issues Involved:
1. Constitutional validity of Chapter III-C and Section 58B(5A) of the Reserve Bank of India Act, 1934.
2. Violation of Articles 14 and 19 of the Constitution.
3. Reasonableness of the two-year compliance period.
4. Criminal liability under Section 58B(5A) and its compatibility with Article 20(1) of the Constitution.

Issue-wise Detailed Analysis:

1. Constitutional Validity of Chapter III-C and Section 58B(5A) of the Reserve Bank of India Act, 1934:
The appeals and writ petitions challenged the constitutional validity of Chapter III-C read with Section 58B(5A) of the Reserve Bank of India Act, 1934, introduced by the Banking Laws (Amendment) Act, 1983. The court examined the extensive regulatory framework established by the Reserve Bank of India (RBI) over the years to control and monitor non-banking financial institutions. The court noted that the legislative intent behind these regulations was to safeguard depositors and maintain economic stability. The court upheld the validity of these provisions, emphasizing that they constitute a regulatory scheme rather than a penal liability.

2. Violation of Articles 14 and 19 of the Constitution:
The appellants argued that Section 45S read with Section 58B(5A) violated Articles 14 and 19 of the Constitution by imposing unreasonable restrictions on the right to carry on business. The court referred to the Delhi High Court's decision in Kanta Mehta's case, which held that these provisions were not violative of Articles 14 and 19. The court reiterated that the restrictions imposed were reasonable and necessary to protect depositors and ensure economic stability. The court emphasized that laws relating to economic activities should be viewed with greater latitude and judicial deference to legislative judgment.

3. Reasonableness of the Two-Year Compliance Period:
The appellants contended that the two-year period prescribed under Section 45S was unreasonable. The court examined the definition of "deposit" under Section 45(1)(bb) of the Reserve Bank Act and the historical context of regulatory directions issued by the RBI. The court found that similar compliance periods had been provided in previous directions, and the interests of depositors were the primary concern. The court concluded that the two-year period was reasonable and necessary to ensure compliance with the regulatory framework.

4. Criminal Liability under Section 58B(5A) and its Compatibility with Article 20(1) of the Constitution:
The appellants argued that imposing criminal liability under Section 58B(5A) for actions that were not offenses at the time of receiving deposits amounted to an ex post facto law, violating Article 20(1) of the Constitution. The court referred to its previous decision in Delhi Cloth and General Mills v. Union of India, which upheld similar provisions under Section 58A of the Companies Act. The court held that the impugned provisions were prospective and not retroactive, and therefore did not violate Article 20(1). The court emphasized the need to protect depositors from fraudulent financial practices and upheld the validity of Section 58B(5A).

Conclusion:
The court dismissed the appeals and writ petitions, upholding the constitutional validity of Chapter III-C and Section 58B(5A) of the Reserve Bank of India Act, 1934. The court emphasized the importance of regulatory measures to protect depositors and maintain economic stability. The court found that the restrictions imposed by these provisions were reasonable and necessary, and did not violate Articles 14, 19, or 20(1) of the Constitution. The court also noted that despite the indulgence granted to comply with the provisions, some appellants had failed to do so, and their failure could not be countenanced. The appeals and petitions were dismissed without any order as to costs.

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