1971 (1) TMI 122 - HC - Companies Law

Summary

Issues Involved:
1. Legislative Competence
2. Distinction between Deposit and Borrowing
3. Validity of Notification and Directions
4. Excessive Delegation
5. Colourable Legislation
6. Control by Reserve Bank of India

Issue-wise Detailed Analysis:

1. Legislative Competence:
The petitioners argued that the impugned provisions of Chapter III-B of the Reserve Bank of India Act, 1934, intrench upon entries 26 and 30 of List II of the Seventh Schedule to the Constitution, which pertain to trade and commerce and money-lending, respectively. They contended that chit funds fall under these entries, making the legislation ultra vires. The court held that the impugned provisions relate to the control of currency and credit by the Reserve Bank, falling under entries 36 and 38 of List I, and not under entries 26 or 30 of List II. The court also noted that chit funds involve special contracts falling under entry 7 of List III, and the President's assent to the Act confirms this view.

2. Distinction between Deposit and Borrowing:
The petitioners contended that Sections 45J, 45K, and 45L of the Reserve Bank of India Act maintain a distinction between deposit and borrowing, which is a well-recognized distinction. They argued that the notification defining "deposit" is ultra vires. The court held that there is a distinction between money-lending and money borrowing, and the impugned provisions controlling money borrowing in the state of deposits from third parties and lending the same are valid.

3. Validity of Notification and Directions:
The petitioners challenged the validity of the notification issued by the Reserve Bank under Sections 45J to 45L, arguing that it was ultra vires and unreasonable. The court found that the notification and the directions issued therein are reasonable, valid, and necessary to safeguard the interests of the investing public. The court upheld the provisions of the notification, including the definition of "deposit," the restrictions on acceptance of deposits, and the particulars to be furnished in advertisements soliciting deposits.

4. Excessive Delegation:
The petitioners argued that Section 45Q of the Reserve Bank of India Act involves excessive delegation. The court held that Parliament is entitled to make a law abrogating or replacing by implication the provisions of any pre-existing law, and no exception can be taken to such legislation on the ground of excessive delegation.

5. Colourable Legislation:
The petitioners contended that the impugned provisions are colourable, as they purport to regulate an activity of the foreman but, in effect, legislate upon a subject reserved for the State. The court rejected this contention, holding that the impugned legislation falls under entries 36 and 38 of List I and is not colourable.

6. Control by Reserve Bank of India:
The court noted that the Reserve Bank of India has comprehensive powers to regulate and control the receipt of public deposits by banking institutions. The impugned provisions aim to extend this control to non-banking institutions, including chit funds, to protect depositors and ensure effective credit control. The court upheld the validity of the directions issued by the Reserve Bank, finding them necessary and reasonable to safeguard the interests of the investing public.

Conclusion:
The court dismissed the writ petitions, holding that the impugned provisions of Chapter III-B of the Reserve Bank of India Act, 1934, and the notification dated October 29, 1966, issued by the Reserve Bank of India, are valid. The petitioners' contentions were found to be without substance, and the court awarded costs to the respondents.