1959 (5) TMI 51 - HC - Companies Law

Summary

Issues Involved:
1. Constitutionality of Section 22 of the Banking Companies Act.
2. Alleged arbitrary action by the Reserve Bank of India.
3. Legality of the procedure adopted by the Reserve Bank under Section 35 of the Act.

Detailed Analysis:

1. Constitutionality of Section 22 of the Banking Companies Act:
The petitioner contended that Section 22 of the Banking Companies Act was unconstitutional as it restricted the fundamental right to carry on banking business. They argued that the power vested in the Reserve Bank of India (RBI) to grant or refuse a license was arbitrary, amounting to a permit system rather than a regulatory license.

The court analyzed the distinction between a permit and a license, noting that a permit system would be unconstitutional if it related to the exercise of fundamental rights. However, a licensing system intended to regulate trade is permissible. The court found that the Banking Companies Act was passed in the public interest, following recommendations by a committee, and aimed at ensuring genuine banking operations while weeding out unsound institutions. The RBI, being a non-political statutory body, was deemed suitable to exercise this regulatory power.

The court held that the power vested in the RBI under Section 22 was quasi-judicial and not arbitrary. The standards for the exercise of this power were laid down in the statute itself, ensuring that genuine banking institutions could operate while protecting public interests.

2. Alleged Arbitrary Action by the Reserve Bank of India:
The petitioner argued that the RBI's refusal to grant a license was arbitrary and that further opportunities should have been given to rectify the defects identified in inspections.

The court noted that the RBI had conducted inspections in 1952 and 1956, revealing fundamental errors and non-compliance with the Act. The RBI had given the petitioner multiple opportunities to rectify these defects over several years. The decision to refuse the license was based on careful consideration of the bank's inability to attract sufficient deposits, poor reserves, and high establishment charges. The RBI's actions were found to be reasonable and not arbitrary, as they aimed to protect the interests of prospective depositors.

3. Legality of the Procedure Adopted by the Reserve Bank under Section 35:
The petitioner contended that after an inspection under Section 35, the RBI could only proceed under Section 35(4) and not refuse the license altogether. Section 35(4) requires reporting to the Central Government, which alone can prohibit a banking company from continuing its business.

The court clarified that Section 35(4) applies to banks that have already been granted a license. However, it is within the RBI's jurisdiction to consider defects or improvements revealed in an inspection under Section 35 when deciding on a license application. The RBI's refusal to grant the license under Section 22(1) was deemed proper, as it was based on relevant facts and within the RBI's jurisdiction.

Conclusion:
The court concluded that the RBI's refusal to grant a license to the petitioner was within its jurisdiction and properly exercised. The petition was dismissed with costs, and no writ was issued under Article 226 of the Constitution.