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TMI Blog2000 (5) TMI 959X X X X Extracts X X X X X X X X Extracts X X X X ..... upheld by us, the said provision shall be liable to be enforced notwithstanding any interim orders to the contrary which may have been passed by any High Court, which interim order must necessarily now lose all its significance. - WRIT PETITION NO. 168 OF 1997 - - - Dated:- 12-5-2000 - B.N. KIRPAL AND M.B. SHAH, JJ. K.N. Raval, A.S. Nambiar, S. Siva Subramaniam, S. Ganesh, R.S. Hegde, Tushar Tijoriwala, P.P. Singh, H.S. Parihar, Kuldeep S. Parihar, Ms. Manisha, Ms. Binu Tamta, S.K. Dwivedi, E.M.S. Anam, S.C. Birla, Ms. Shanta Basudevan, P.K. Manohar, K.V. Vishwanathan, K.V. Venkataraman, Krishnamurthi Swami, T. Harish Kumar, V. Balachandran, A.T.M. Sampath, V. Balaji and Manish Singhvi for the Appearing Parties. JUDGMENT Kirpal, J. - The appellants who carry on the business of shroffs are impugning the validity of section 9 [ sic Section 45S] of the Reserve Bank of India Act as amended by the Amendment Act, 1997 ( the Act ), on the ground that the said provision is violative of articles 14 and 19(1)( g ) of the Constitution of India. 2. The trade of business of shroffs in India has been in existence for a long time. This trade is carried on not only in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-banking companies or institutions. The provisions of the said Chapter III-B did not apply to individuals or firms like the appellants who are not incorporated but still do business which is akin to that of banking. In order to place some restrictions of the acceptance of deposits by unincorporated bodies, by the Banking Laws (Amendment) Act, 1983 (Act 1 of 1984), Chapter III-C and section 58B(5A) were inserted into the Act. The relevant portion of principal restrictions in Chapter III-C which were contained in section 45S, read as under : "Deposits not to be accepted in certain cases. (1) No persons being an individual or a firm or an unincorporated association of individuals shall, at any time, have deposits from more than the number of depositors specified against each, in the table below : TABLE "( i )Individual Not more than twenty-five depositors excluding depositors who are relatives of the individual. ( ii )Firm Not more than twenty-five depositors per partner and not more than two hundred and fifty depositors in all, excluding, in either case, depositors who are relatives of any of the partners. ( iii )Unincorporated Associat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not have the desired effect. The non-corporate sector was virtually free from all disciplines even though its activities were same or similar to the corporate sector, the difference only being in the magnitude and that too only in some cases. According to the respondents, it was to rectify this imbalance that first an ordinance was issued which sought to completely prohibit any receipt of deposits by unincorporated associations in the non-corporate sector. When certain hardships were pointed out by those who did not carry on the business comparable to the companies which were under Chapter III-B i.e., who did not borrow money or receive advances to carry on business in the financial sector but borrow money for their own trade or manufacture, the Act, which replaced the ordinance, watered down the rigour to some extent. The newly incorporated section 45S, which is impugned in this writ petition, is as follows : "45S (1) No person, being an individual or a firm or an unincorporated association of individuals shall, accept any deposit : ( i ) If his or its business, wholly or partly includes any of the activities specified in clause ( c ) of section 45-I; or ( ii ) If h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cing activities or lending subject to the regulations in respect of Non-Banking Financial Companies. ( d )Individuals and firms holding deposits on 1-4-1997, must repay such deposits immediately after such deposits become due for repayment or within two years (before 31-3-1999), whichever is earlier. ( e )On and from 1-4-1997 no individual or firm may issue advertisement in any form for soliciting deposits. ( f )All non-banking financial companies must have a minimum of Rs. 25 lakhs of net owned funds (NOF) and withdraw the deposits and/or take loans before the agricultural operations commence. The agriculturists and small traders who earn valuable interest on net deposits will no longer be able to do so. The impugned section 45S does not in any way prohibit or restrict any unincorporated body or individual from carrying on the business that it likes. It is open to unincorporated bodies to carry on their financial business either from their own funds or the funds borrowed from their relatives or from financial institutions. The restriction, which is placed by section 45S, is on the carrying on of such business by utilising public deposits. 5. The grievance of the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Constitution must not be arbitrary or of an excessive nature so as to go beyond the requirement of felt need of the society and object sought to be achieved. ( b )There must be a direct and proximate nexus or a reasonable connection between the restriction imposed and the object sought to be achieved. ( c )No abstract or fixed principle can be laid down which may have universal application in all cases. Such consideration on the question of quality of reasonableness, therefore, is expected to vary from case to case. ( d )In interpreting constitutional provisions, Courts should be alive to the felt need of the society and complex issues facing the people which the legislature intends to solve through effective legislation. ( e )In appreciating such problems and felt need of the society the judicial approach must necessarily be dynamic, pragmatic and elastic. ( f )It is imperative that for consideration of reasonableness of restriction imposed by a statute, the Court should examine whether the social control as envisaged in article 19 is being effectuated by the restriction imposed on the Fundamental Rights. ( g )Although article 19 guarantees all the seven freed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... velopment but there was a proliferation of such unincorporated bodies engaged in financial intermediation. As pointed out in para 3 of the statement of objects and reasons the existing provisions were flouted by unscrupulous entities by floating different partnership firms when a firm reached the level of 250 depositors. This multiplication of firms took place with a view to circumvent the rigour of the law. It appears that after the introduction of section 45S in 1984, several complaints were received by the RBI from various parts of the country regarding rampant malpractices being adopted by several persons/firms especially in the State of Kerala. Sample studies, which were conducted, revealed several astonishing features and the menace of such unincorporated associations accepting public deposits and the mushroom growth of such intermediaries. These business firms were commonly known in Kerala as blade companies so called because of their usurious lending rates. The study showed that these blade companies drew sustenance from human greed. These blade companies were offering interest of 36 per cent and in turn were charging excessive interest from the borrowers. By the ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to meet their credit requirements. It appears that the institutional finance is available far more easily now than before. With these facilities now being available and in view of the inherent risks to the general public at the hands of the unincorporated bodies engaged in financial activities and accepting public deposits, we agree that the restrictions now imposed by the amended section 45S cannot be considered as being unreasonable. 8. As has already been observed, there is no total prohibition or ban from accepting deposits by unincorporated bodies. It is only such unincorporated bodies as are carrying on business referred to in clauses I and II of sub-section (1) of section 45S which cannot accept deposits from the public. They can however receive loans from relatives. The appellants cannot claim a fundamental right to carry on the business of financing with other people s money. In other words, there can be no unrestricted fundamental right to accept deposits from the public. This Hon ble Court has observed in Peerless General Finance and Investment Co. Ltd. v. RBI [1992] 2 SCC 343 that there is no fundamental right to do any unregulated business with subscribers/dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilities as and when they are called upon or when any demand is made for repayment. Since non-banking financial companies were not subjected to such cash reserve requirement, it was not desirable to allow non-banking financial companies to accept demand deposits. In any case, such bodies were nothing but para banking institutions and either they had to be regulated on the lines of the financial institutions and if that was not feasible, they should have appropriately been prohibited from accepting deposits from public. After all, the right to raise public deposit could not be construed as a fundamental right. The restrictions imposed cannot be considered unreasonable or arbitrary. 11. The RBI has not acted hastily. Before amending section 45S of the Act in 1997, it had the benefit of having with it the reports of number of committees, all of whom had recommended that the unincorporated business firms/individuals be brought under certain discipline and, if possible, non-banking financial business was not to be permitted to be carried on by the unincorporated bodies. It will be useful in this regard to refer to the report of the study group on non-banking financial intermedi-aries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Legislature. The Court should feel more inclined to give judicial deference to Legislature judgment in the field of economic regulation that in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Dond (354 US 457) where Frankfurther J. said in this inimitable style : In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The Courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events Self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability. The Court must always remember that legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... promising high returns, it was necessary to prohibit unincorporated bodies from accepting deposits from the public. Further, as observed by this Court in Srinivasa Enterprises case ( supra ), "it is a constitutional truism that restrictions in extreme cases should be pushed to the point of prohibition, if any lesser strategy will not achieve the purpose." 12. It cannot be denied that shroffs have played an important role in providing finance in the rural sector and in small towns. But, despite the services which they may have rendered, it is difficult to accept the contention that the RBI was not justified in imposing ban on unincorpo- rated bodies accepting deposits from public while carrying on financing business. The inherent danger to the public especially in small towns and villages in permitting such business to be carried on unchecked and unregulatory was ample justification for the impugned legislation, keeping in mind the experience of the public which had been dealing with such unincorporated bodies in Kerala and Tamil Nadu. It is open to the appellants to organise their business within the permissible legal set up by forming non-banking financial corporations and f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of protecting large number of depositors from unincor-porated financial institutions which would suddenly mushroom over- night and then vanish without a trace but taking with it depositors money, left the RBI with no alternative but to prohibit such unincorporated entities from conducting financial business which was more than akin to banking. The restrictions imposed against acceptance of deposits by unincorporated bodies carrying on financial activity or the business of deposit acceptance or lending in any manner are in the larger interest of general public vis a vis few persons accepting such deposits. The need for such restrictions had become acute and imperative in view of large scale mismanagement of public funds by such unincorporated bodies. Accordingly, we hold that the provisions of section 45S are valid. 14. Before we conclude there is another matter to which we must advert to. It has been brought to our notice that section 45S has been challenged in various High Courts and few of them have granted the stay of provisions of section 45S. When considering an application for staying the operation of a piece of legislation, and that too pertaining to economic refor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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