9911796707
TMI Blog2005 (11) TMI 259X X X X Extracts X X X X X X X X Extracts X X X X ..... y Reserve Bank of India (Amendment) Act, 1997, and section 45-IA was introduced as per which it became obligatory, on the part of such NBFCs to obtain necessary licence from the RBI in order to carry out/continue their non-banking finance activities. Number of other provisions were inserted through this amendment like creation of reserve fund and requirement of transfer of certain percentage of profit every year to the fund (section 45-IC), the prescription of liquidity requirement (section 45-IB), etc. vide section 45-IA, RBI has been vested with powers to issue guidelines encompassing aspects such as income recognition, ac- counting standards, provision for bad and doubtful debts, capital adequacy, etc. The provisions are intended to ensure sound and healthy operation and the quality of assets of these companies. The bank has been empowered (i) to issue directions to the auditors of NBFCs and order special audit of NBFCs (section 45MA); (ii) to prohibit acceptance of deposits and alienation of assets by NBFCs (section 45MB); and (iii) to make an application for winding up NBFCs (section 45MC). Powers have also been vested in the Company Law Board ('CLB') under, section 45QA for d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essary direction be given to convene separate meetings of the equity shareholders and unsecured creditors of the three companies and for the purpose of these meetings, chairman and alternate chairman be appointed. 4. It is stated in the petition that the scheme is necessary for the company to restart their business and make payment to their secured and unsecured creditors and to revive their prospects. The details of total creditors of each company are given in para-19 of the petition, which are as under: Name of company Total creditors (Rs. in lakh) Public deposits (Rs. in lakh) Inter corporate deposits (Rs. in lakh) Other creditors (Rs. in lakh) JVGFL 21,350 5,850 13,400 2,100 No. of creditors 80,104 80,000 7 97 JVGLL 4,800 4,000 Nil 800 No. of creditors 25,085 25,000 Nil 85 JVGSL 150.25 150 Nil 0.25 No. of creditors 15,003 15,000 Nil 3 Total (Rs. in lakh) 2,63,00.25 10,000 13,400 2,900.25 Total (No. of creditors) 1,20,192 1,20,000 7 185 5. For the purpose of the scheme, the depositors have been re-grouped into the following three categories : S. No. Category of depositors Number of depositors Amount (Rs. in lakhs) 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .57 3,267.04 16,517.27" 7. Mr. Mukul Rohtagi, learned senior counsel appearing for the JVG companies/petitioners, submitted that in this petition filed under section 391(1) of the Act, the only prayer made is for convening of the meetings of different categories of creditors as well as shareholders in order to ascertain their views on the proposed scheme. His argument was that in the first instance, a scheme is to be put to the creditors and shareholders, as requirement of law is that creditors and shareholders of the value of 75 per cent have to approve such a scheme. If the scheme is approved by the shareholders and creditors, thereafter sub-section (2) of section 391 of the Act prescribes the procedure for sanctioning of the scheme and at that stage, public notice is to be issued inviting objections, if any, including from the Central Government and the Official Liquidator and at that stage, the court is to consider as to whether such a scheme is to be approved or not. His submission, therefore, was that at this stage, order for convening of the meetings only is to be passed and it was not open to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an be entertained allowing it to divert its business activity and start some business other than non-banking finance business for which it was primarily incorporated ? (b)Whether the scheme proposed by the company is feasible enough to permit it to put it to the shareholders and the creditors ? Question (a) 10. In order to answer the question posed at (a) above, one will have to scan through the legislative history and the raison d'etre which persuaded, nay, compelled the Legislature to make amendment in the RBI Act providing for the provisions of obtaining licence by NBFCs from the RBI and permitting the RBI to file winding up petition in case of those NBFCs whose licences are rejected, or if given, but subsequently cancelled. 11. In the year 1949, Banking Regulation Act, 1949 was enacted for the purpose of consolidating and amending the law relating to banking. The main objective of the said Act was to protect the interests of the depositors, especially, in the light of failure of several banking institutions and many banking institutions going into liquidation, rendering thousands of depositors penniless and consequently ruined. By the said enactment, the acceptance of depos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chapter III-B was inserted in the RBI Act by the Banking Laws (Miscellaneous Provisions) Act, 1963 under which powers were conferred on the Bank to issue suitable direction for regulating and monitoring the deposit acceptance activities of those companies and corporate bodies. 12. With this legislative backing, the RBI issued Non-Banking Financial Companies Directions making them effective from 1-1-1967. Subsequently, Non-Banking Non-Finance Companies Directions, 1967 and Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977 were also issued to curb the practices of certain companies whereby these companies started collecting funds from public by way of subscription to various chit or benefit schemes, a device adopted to skip the rigours of 1967 Directions. Another practice adopted by certain companies came to the notice of authorities, namely, deposits taken by such companies from public for the purpose of their own business. It was found that the companies were not refunding these deposits on due dates and many companies even went into liquidation. It was, therefore, considered necessary to maintain necessary liquidity and for making it a statutory obligation to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Amendment Act 23 of 1997. Existing provisions of Chapter III-B were amended and some new provisions were introduced including sections 45-IA to 45-IC requiring registration of NBFC and obligating NBFC to create a reserve fund, section 45JA empowering RBI to determine policy and issue directions. Apart from these and other newly added provisions, two significant provisions introduced are section 45MB and section 45MC. Under section 45MB, RBI has power to prohibit any NBFC, which violates the provisions of any section or fails to comply with any direction or order given by the RBI, from accepting any deposits, and can also restrain such NBFC from alienating its assets. Section 45MC, under which winding-up petition has been filed by the RBI against the petitioner company/reads as under : "45MC. Power of Bank to file winding up petition.-(1) The Bank, on being satisfied that a non-banking financial company,- (a )is unable to pay its debt; or (b)has, by virtue of the provisions of section 45-IA become disqualified to carry on the business of a non-banking financial institution; or (c )has been prohibited by the Bank from receiving deposit by an order and such order has been i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, 1997 contained in Chapter III-C of the Reserve Bank of India Act, the unincorporated bodies circumvented the statutory restrictions by floating different partnership firms as and when a firm reached the level of 250 depositors. Further, it is reported that several unincorporated bodies were advertising aggressively through various media soliciting deposits from public by offering high rates of interest and other incentives. 4. The Reserve Bank of India (Amendment) Ordinance, 1997, further to amend the Reserve Bank of India Act, provides several safeguards for the NBFCs so as to ensure their viability. These include compulsory registration of the NBFCs with Reserve Bank of India, stipulation of minimum net owned funds requirement, creation of reserve fund and transfer of certain percentage of profits every year to the fund and prescription of liquidity requirement. RBI has also been vested with powers to issue guidelines encompassing aspects such as income recognition, accounting standards, provision for bad and doubtful debts, capital adequacy, etc., which are intended to ensure sound and healthy operations and the quality of assets of these companies. RBI is also being empower ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in section 45-IA to be open-ended. If this factor is lost sight of, the mischief which is intended to be eradicated could be allowed to fester unendingly. Accordingly, at the time of filing of the application if some deficiencies are found to be in existence, the period in which these must be overcome and eradicated within a reasonably short period. It is in this regard that the embargo of six years in the aggregate has been laid down.' [para 5 at p. 240 of Comp. LJ] 16. In this backdrop, one has to examine the special power given to the RBI under section 45MC of the RBI Act to file the petition seeking winding up of the company. Under section 439 of the Act, the categories of persons who can file winding up petition are specifically mentioned and the RBI is not named therein. However, notwithstanding the same, the Legislature wanted specific power to be conferred upon the RBI to seek winding up of erring NBFC. However, section 45MC of the RBI Act is more than mere enabling provision as it contains the specific grounds on which the RBI can file winding up petition. It may be noted that section 433 of the Act stipulates the circumstances under which a company can be wound up. Howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olation of the regulatory mechanism provided under the RBI Act have no right to exist and should be wound up. Thus, Legislature in no uncertain terms mandated that such companies have no right to exist; otherwise, there was no necessity for providing the provision of winding up. The situation could be remedied by prohibiting such a company from doing the business as non-banking financial institution thereby permitting them to do some other business. Parliament, in its wisdom, considered that it would not be a sufficient safeguard and, therefore, provided for extreme measure of winding up of these companies as the solution for checking the menace of dubious practices which could be adopted by these companies. I may immediately add here that when a petition is filed by the RBI under section 45MC of the RBI Act, it is for the court to examine as to whether in a given case whether the orders of winding up of such a company are to be passed or not. However, once it is found that any of the grounds mentioned in sub-section (1) of section 45MC exists, the company should be ordered to be wound up. 19. It would not be permissible for such a company to take a detour by coming out with a ple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) of section 45MC is satisfied. Position may be different if the petition is filed only on the ground of inability of the NBFC to pay the debt. In that case, if the court is of the opinion that such a company is in a position, the court may in that case, consider such a scheme which course of action would be in the interest of the depositors as they would be in a position to get back their money under the scheme if such scheme is found to be viable. This is the only exception which can be made to the general proposition laid down above with the rider that even in such cases, the court would consider the scheme with much circumspection. Otherwise, as rightly contended by Mr. Dushyant Dave, learned senior counsel, appearing for the RBI, it would amount to permitting the petitioner to do something indirectly which it cannot do directly. The petitioner has got money from depositors. Assets are acquired from the funds created in the form of such deposits and now, the company wants to do some other business with those assets thereby retaining the funds of those depositors and wants to pay them in phased manner as envisaged in the proposed scheme. Question (b) 22. Even if it is presu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d gross violations in the matter of repayment of their deposits. (e)All the three companies are defunct for the past several years. Even the proposed transferor-company is under orders of winding up. (f)The scheme proposes postponement of repayment for another five years and mentions that depositors under Rs. 5,000 category would get their refund in four consecutive years. 23. This would show that there is no substance or weight in the proposed scheme. Earlier also scheme of rehabilitation was proposed by filing applications in all the petitions; but the court had rejected the said scheme. When such a scheme is proposed, normally, at the stage of first motion, it is to be put to the shareholders and various categories of creditors, etc., in order to ascertain as to whether three-fourths of the value of shareholders and creditors approve such scheme or not. If shareholders and creditors do not approve the scheme, that would be the end of the matter and court is not to go into further scrutiny. However, if such a scheme is approved by the shareholders and creditors, at the time of second motion, the court is to examine whether such a scheme is to be approved and in the process con ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
