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2022 (5) TMI 702 - SC - Indian LawsInterpretation of statute - whether Non Banking Financial Companies (NBFC) regulated by the Reserve Bank of India, in terms of the provisions of Chapter IIIB of the Reserve Bank of India Act, 1934 (RBI Act) could also be regulated by State enactments such as Kerala Money Lenders Act, 1958 (Kerala Act) and Gujarat Money Lenders Act, 2011 (Gujarat Act)? HELD THAT - Section 45Q confers overriding effect upon Chapter IIIB, over other laws. Therefore, the States of Gujarat and Kerala cannot contend that the laws made by them are in addition to the provisions of Chapter IIIB. Though it was contended by the learned counsel appearing for the State of Gujarat that the Gujarat Act exempts NBFCs registered under the RBI Act from seeking registration under the Gujarat Act, we do not think that the same would go to the rescue of State of Gujarat. Under Section 5(2) of the Gujarat Act, NBFCs registered under the RBI Act are deemed to have been registered under the Gujarat Act. Therefore, all other provisions of the Gujarat Act are sought to be applied to NBFCs operating in the State of Gujarat. The other provisions of the Gujarat Act include the (i) power of search and seizure; (ii) requirement to maintain certain books and registers and to furnish statements; and (iii) the mandate not to dispose of any article taken from a debtor as a pawn, pledge or security, before a period of two years from the date stipulated for final payment, etc. The Gujarat Act also empowers the Civil Court under Section 30 to reopen certain transactions and to limit the interest recoverable. Section 32 of the Gujarat Act empowers the borrower to deposit the money before a Civil Court and the civil Court to assume jurisdiction of the adjudication of the dispute - Interestingly, Gujarat Act, 2011 tacitly recognizes the regulation of NBFCs under the RBI Act. Yet the State got the assent of only the Governor. The Kerala Act and the Gujarat Act will have no application to NBFCs registered under the RBI Act and regulated by RBI. Therefore, all the appeals filed by NBFCs against the judgment of the Kerala High Court are allowed. Likewise the appeals filed by the State of Gujarat against the judgment of the Gujarat high Court are dismissed.
Issues Involved:
1. Whether Non-Banking Financial Companies (NBFCs) regulated by the Reserve Bank of India (RBI) under Chapter IIIB of the RBI Act, 1934, can also be regulated by State enactments like the Kerala Money Lenders Act, 1958, and the Gujarat Money Lenders Act, 2011. Detailed Analysis: Kerala: The Kerala Money Lenders Act, 1958, aimed to regulate money lending and protect borrowers from usurious loans. Initially, NBFCs were not common, so the Act did not specifically address them. As NBFCs grew, Kerala required them to obtain licenses under the Act, leading to legal challenges by NBFCs. The Kerala High Court upheld the application of the Act to NBFCs, prompting appeals to the Supreme Court. Gujarat: The Gujarat Money Lenders Act, 2011, followed the Bombay Money Lenders Act, 1946. The Gujarat High Court initially disagreed with the Kerala High Court and exempted NBFCs from the Act. The Gujarat legislature then enacted the Gujarat Act, 2011, which was challenged by NBFCs. The Gujarat High Court declared the Act ultra vires the Constitution concerning NBFCs, leading to appeals by the State of Gujarat. Scheme of Kerala Act, Gujarat Act, and RBI Act: The Kerala and Gujarat Acts regulate money lending under Entry 30 of List II (State List) of the Seventh Schedule of the Constitution. However, the RBI Act, under Entries 38, 43, and 45 of List I (Union List), governs the incorporation, regulation, and winding up of financial corporations, including NBFCs. The Supreme Court examined whether State laws could apply to NBFCs regulated by the RBI. Broad Scheme of Kerala Act: The Kerala Act defines "money lender" and excludes certain entities like banks but not NBFCs. The Act requires money lenders to obtain licenses, maintain books of accounts, and adhere to prescribed interest rates. The State argued that NBFCs should be included under the Act as they were not explicitly excluded. Broad Scheme of Gujarat Act: The Gujarat Act defines "money lender" and "loan" similarly to the Kerala Act. It mandates registration, maintenance of accounts, and adherence to interest rates. The Gujarat Act also includes provisions for search and seizure, and the reopening of transactions by Civil Courts. Role of RBI and Chapter IIIB of the RBI Act: The RBI Act, 1934, was amended to include Chapter IIIB, empowering the RBI to regulate NBFCs comprehensively. The RBI's regulatory framework includes registration, capital adequacy, reserve requirements, and the power to issue directions and inspect NBFCs. The Supreme Court noted that the RBI's control over NBFCs is extensive, from registration to winding up, making Chapter IIIB a complete code. Regulations and Directions by RBI: The RBI has issued various regulations, directions, and Master Circulars governing all aspects of NBFC operations, including loans and interest rates. These regulations ensure that NBFCs operate within a framework that protects depositors and maintains financial stability. Is Chapter IIIB a Complete Code? The Supreme Court affirmed that Chapter IIIB of the RBI Act is a complete code for NBFC regulation. The RBI's comprehensive control over NBFCs precludes the application of State laws like the Kerala and Gujarat Acts. Doctrine of Eclipse, Conflict, and Repugnancy: The Supreme Court applied the doctrine of eclipse, noting that State laws valid at the time of enactment could become inapplicable due to subsequent central legislation. The Court found that the RBI Act, being a central law, overrides State laws regulating NBFCs. The principle of repugnancy under Article 254 of the Constitution did not apply as the RBI Act is traceable to List I and State Acts to List II. Conclusion: The Supreme Court concluded that the Kerala and Gujarat Acts do not apply to NBFCs registered under the RBI Act and regulated by the RBI. The appeals by NBFCs against the Kerala High Court judgment were allowed, and the appeals by the State of Gujarat were dismissed. The Court also quashed the FIR against an NBFC officer under the Kerala Act and dismissed an application for impleadment related to the Tamil Nadu Pawn Brokers Act. The judgment underscores the RBI's exclusive authority over NBFCs, rendering State laws inapplicable to these entities.
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