1985 (12) TMI 361 - HC - Companies Law

Issues Involved:
1. Constitutional validity of Chapter II-C read with section 58B (5A) of the Reserve Bank of India Act, 1934.
2. Violation of fundamental rights under Articles 19 and 14 of the Constitution of India.
3. Legislative competence of Parliament to enact the impugned provisions.
4. Reasonableness of restrictions imposed by the impugned legislation.
5. Compulsion to form an association under Article 19(1)(c).

Issue-wise Detailed Analysis:

1. Constitutional Validity of Chapter II-C and Section 58B (5A):
The petitioners challenged the constitutional validity of Chapter II-C read with section 58B (5A) of the Reserve Bank of India Act, 1934, introduced by the Banking Laws (Amendment) Act, 1983. The court held that the impugned legislation was constitutional and did not violate Articles 14 and 19 of the Constitution. The court emphasized that the restrictions imposed were reasonable and in the interest of the general public.

2. Violation of Fundamental Rights under Articles 19 and 14:
The petitioners argued that the provisions of Chapter II-C, particularly section 45S read with section 58B (5A), were violative of their fundamental rights guaranteed under Articles 19 and 14. The court held that the restrictions were not arbitrary or excessive and were necessary in the interests of the public. The court noted that the phrase "reasonable restriction" implies intelligent care and deliberation and that the limitations imposed were not beyond what was required in the public interest.

3. Legislative Competence of Parliament:
The petitioners questioned the legislative competence of Parliament to enact the impugned provisions, arguing that the legislation fell within the domain of state legislation under Entry 30 (money-lending) and Entry 32 (incorporation of unincorporated trading) of List II of the Seventh Schedule. The court rejected this argument, holding that the business of accepting deposits and lending money was akin to banking and fell within Entry 45 (banking) of List I of the Seventh Schedule. The court also held that even if the activities were not strictly banking, they would fall under Entry 97 (residuary powers) of List I, thus affirming Parliament's competence.

4. Reasonableness of Restrictions:
The petitioners contended that the restrictions imposed by section 45S(2) were disproportionate and amounted to a prohibition of their business. The court held that the restrictions were reasonable and necessary to protect the interests of small depositors and to prevent the misuse of public deposits. The court noted that the legislation was based on various reports and studies highlighting the need for regulation of non-banking financial intermediaries to ensure the safety of depositors' funds and the stability of the financial system.

5. Compulsion to Form an Association under Article 19(1)(c):
The petitioners argued that the impugned legislation compelled them to form an association, violating their right under Article 19(1)(c) to form associations. The court rejected this argument, stating that there was no compulsion to form a company. The legislation provided for two distinct classifications: individuals or associations with limited depositors and companies with no such limits. The court held that the classification was reasonable and related to the objective of protecting depositors' interests.

Conclusion:
The court concluded that the impugned legislation was constitutional, imposed reasonable restrictions, and was within the legislative competence of Parliament. The petition was dismissed, and all interim stay orders were vacated. The court granted a certificate for appeal to the Supreme Court, recognizing the importance of the issue and its impact on institutions across India.

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