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2014 (1) TMI 1639 - HC - Indian LawsConstitutional validity of Section 2(1)(o) of the SARFAESI Act and the RBI Circular dated 1st July 2013 - Violation of Article 14 - whether it is on the whims and fancies of the financial institutions to classify the assets as non-performing assets - Held that - As a matter of fact a policy has been laid down by Reserve Bank of India providing guidelines in the matter for declaring an asset to be a non-performing asset known as RBI's prudential norms on income recognition, asset classification and provisioning -- pertaining to advances‖ through a circular dated 30-8-2001 - The petitioner could not place any convincing material to show that Section 2(1)(o) of the Act and the RBI Circular dated 1st July 2013 are unreasonable, arbitrary or otherwise repugnant to the constitutional principle. Consequently, we are of the view that the petitioners are not able to rebut the presumption of constitutionality of Section 2(1)(o) of the SARFAESI Act and the RBI Circular in question. Section 2(1)(o) of the Act defines NPA as an asset or accountable receivable of a borrower, which has been classified by banks or financial institutions in terms of RBI guidelines as sub-standard, doubtful and loss asset. Clause 4.1 of the RBI guidelines classifies NPA into three categories - sub-standard, doubtful and loss asset. Once the account finds place in any of these categories, it becomes an NPA with respect to clause 2.1 of the RBI guidelines. Broadly speaking, the classification of assets into sub-standard, doubtful or loss asset is done taking into account the degree of well-defined credit weakness and extent of dependence on collateral securities for realisation of dues. The Legislature has left it to RBI to identify, define and classify different assets in accordance with current international best practices as well as the changing economic scenario of the country. We are of the opinion that the Legislature has clearly defined NPA under Section 2(1)(o) of the SARFAESI Act and the RBI guidelines are issued to improve quality of assets of the bank and to recover the public money speedily. There is no excessive delegation or scope for the banks to act upon basing on their whims and fancies, but they are governed by the guidelines issued by the RBI which under Section 21 of Banking Regulation Act 1949 is empowered to lay guidelines in the interest of banking policy relating to advances to be followed by the banking companies. It is settled law that in the matters of policy decisions of the Government in respect of economic matters, Courts cannot interfere unless such policy is contrary to the Constitution. Section 2(1)(o) of SARFAESI Act clearly defines NPA as an asset or an account which has been classified as a sub-standard, doubtful or loss asset. Consequently, the Indian Parliament while enacting SARFAESI Act has not delegated essential legislative function to the RBI / Financial Institution with regard to the concept of NPA. - impugned Circular issued by the RBI, which provides guidelines for determining NPAs, is in conformity with Section 2(1)(o) of the SARFAESI Act. Clause 2.1 of the RBI Circular is beneficial in nature inasmuch as even though a customer may be a defaulter on account of his failure to pay interest or repay principal in accordance with the contract, yet he would be classified as NPA only if the default continues beyond ninety days. There is no discretion vested with the Bank under Section 2(1)(o) of SARFAESI Act to pick and choose an account as an NPA at its own whim and fancy. In declaring an account as an NPA, the Banks have to act in accordance with the provisions of the Act and the various Circulars / Guidelines issued by the RBI. - Moreover, if the borrower is aggrieved by the action taken by the Banks under Sections 2(1)(o) and 13(4) of the SARFAESI Act, the same can be challenged before the Debt Recovery Tribunal under Section 17 of the SARFAESI Act. Consequently, Section 2(1)(o) of SARFAESI Act is neither unreasonable nor violative of Articles 14 and 19(1)(g) of the Constitution, as alleged by the petitioners. - Section 2(1)(o) of the SARFAESI Act and the RBI Circular dated 1st July 2013 are perfectly legal, valid and are not violative of Articles 14 and 19(1)(g) of the Constitution of India - Decided against Appellant.
Issues Involved:
1. Constitutional validity of Section 2(1)(o) of the SARFAESI Act, 2002. 2. Legality of the RBI Circular dated 1st July 2013. 3. Violation of Articles 14 and 19(1)(g) of the Constitution of India. 4. Alleged excessive delegation of legislative function to banks/financial institutions/RBI. 5. Alternative remedy under Section 17(1) of the SARFAESI Act. Issue-wise Detailed Analysis: 1. Constitutional Validity of Section 2(1)(o) of the SARFAESI Act, 2002: The petitioners challenged Section 2(1)(o) on the grounds that it does not define "sub-standard," "doubtful," or "loss asset," thus delegating essential legislative functions to banks/financial institutions/RBI. They argued this delegation violated Article 14 and 19(1)(g) of the Constitution, giving uncontrolled discretion to declare any entity as an NPA, adversely affecting businesses. The court, however, upheld the constitutionality, stating that the definition of NPA is precise and the RBI guidelines provide sufficient direction for classification. The court emphasized that the legislative policy and guidelines are adequately laid down by the Parliament, and the RBI is empowered to carry out the policy within these guidelines. The court also noted that the guidelines are issued to improve asset quality and recover public money speedily, and there is no excessive delegation or arbitrary power. 2. Legality of the RBI Circular dated 1st July 2013: The petitioners contended that the RBI Circular was contrary to Section 2(1)(o) of the SARFAESI Act, as it allowed banks to declare an account as NPA based on their discretion. The court found that the Circular is in conformity with Section 2(1)(o) and beneficial, as it classifies an account as NPA only if the default continues beyond ninety days. The court highlighted that the classification of assets into sub-standard, doubtful, or loss is dynamic and left to the regulators to align with international best practices and changing economic scenarios. The court concluded that the Circular provides clear guidelines and does not allow banks to act on whims and fancies. 3. Violation of Articles 14 and 19(1)(g) of the Constitution of India: The petitioners argued that Section 2(1)(o) and the RBI Circular violated Articles 14 and 19(1)(g) by creating unreasonable classification and giving arbitrary power to banks. The court reiterated the presumption of constitutionality of enactments and the burden on the petitioner to prove otherwise. It held that the classification between different banks and financial institutions is based on intelligible differentia with a rational relation to the object sought to be achieved. The court found no irrational or unreasonable classification and upheld the provisions as neither arbitrary nor violative of constitutional rights. 4. Alleged Excessive Delegation of Legislative Function: The petitioners claimed that essential legislative functions were delegated to banks/financial institutions/RBI without adequate guidelines. The court referred to established legal principles that legislatures can delegate non-essential functions with clear policy and guidelines. It found that Section 2(1)(o) and the RBI guidelines provide sufficient legislative policy and standards, and the delegation is valid. The court emphasized that the RBI's role in defining and classifying NPAs is within the legislative framework and necessary for adapting to economic changes. 5. Alternative Remedy under Section 17(1) of the SARFAESI Act: The respondents argued that the petitions were not maintainable as the petitioners had an alternative remedy under Section 17(1) of the SARFAESI Act to challenge the notices issued under Section 13(4). The court agreed, noting that the petitioners should have approached the Debt Recovery Tribunal within the stipulated time. The court emphasized that writ petitions should not be entertained when a statutory forum is available for redressal of grievances, especially in fiscal matters. Conclusion: The court concluded that Section 2(1)(o) of the SARFAESI Act and the RBI Circular dated 1st July 2013 are legal, valid, and not violative of Articles 14 and 19(1)(g) of the Constitution. The petitions were dismissed with no order as to costs.
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