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TMI Blog1993 (2) TMI 320X X X X Extracts X X X X X X X X Extracts X X X X ..... ector was not free from blame. It had done damage to the economy and brought ruination to small depositors. This was why Section 58A in the Companies Act of 1956 came to be introduced. It cannot be contended that suddenly the companies like the appellant and the petitioners arc called upon to reduce deposits. Even otherwise, the interests of the depositors is the prime concern. Unquestionably, Rule 3A is to deposit 10% of the deposits maturing during the year in the manner prescribed in Rule 3. Some deposits would be maturing between April 1, 1978 and March 31, 1979. To provide for such marginal situation, a proviso is inserted. Does it to make the rule retroactive? Of course, not. Appeal dismissed - W.P.(C) 508 OF 1988 - - - Dated:- 5-2-1993 - L.M. SHARMA, S MOHAN, N VENKATACHALA, JJ. D.N. Dwivedi, Additional Solicitor General, G. Viswanatha Iyer, K.N. Bhat, Anil B. Diwan, E.M.S. Anam, P.H. Parekh, C.N. Sree Kumar, R. Mohan, S. Balakrishnan, M.K.D, Namboodiri, M.S. Ganesh, S.S. Khanduja, Y.P. Dhingra, B.K. Satija, Kuldeep, S. Paribar. H.S. Parihar, Ms. A Subhashini, C.V. Subba Rao, K,R. Nambiar, M.P. Shorawala, D.K, Garg, S.K. Nandy,Randhir Jain, Ms.Malini Poduval,M.A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 10A provided that the Board of Directors shall include persons with professional or special knowledge. Section 10A(5) empowered the Reserve Bank of India to vary the composition of the Board. When a report of the Study Group of non-banking financial intermediaries was submitted in the year 1971 that was studied. Thereafter in 1973 the Reserve Bank of India issued Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1973 placing certain restrictions on companies carrying on prize chit and chit business from receiving deposits from the public. In 1974, Section 58A of the Companies Act was inserted by the Companies (Amendment) Act of 1974, which came into force from 1st of February, 1975. The object was to regulate deposits received by non-banking non-financial companies. The financial companies were already covered by Reserve Bank of India directions under the Reserve Bank of India Act. Therefore, they were exempted under Section 58A (7) from the purview of that Section. Since the non-banking nonfinancial companies came within the purview of Section 58A, the earlier directions issued by the Reserve Bank of India Act to non-banking nonfinancial companies in the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the number of depositors specified against each, in the table below.- (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-Not more than twenty five depositors per Association of individual and not more than two hundred and individualsfifty depositors in all excluding, in either case, depositors who are relatives of any of the individuals constituting the association. (2) Where at the commencement of Section 10 of the Banking Laws (Amendment) Act, 1983 the deposits her by any such person are not in accordance with sub-section (1), he shall before the expiry of a period of two years from the date of such commencement, repay such of the deposits as are necessary for bringing the number of depositors within the relative limits specified in that sub section. Explanation :- For the purposes of this section (a) a person shall be deemed to be a relative of another if, and only if, (i) they are memb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld accept. Chapter III-C of the Reserve Bank of India Act, 1934, imposes reasonable restrictions on the right of individuals, firms and unincorporated associations to carry on the business of acceptance of deposits and advancing or giving loans to the public. There is also a further safeguard that Chapter 111-C is being operated under the supervision and control of the Reserve Bank of India. The business of acceptance of deposits from the public does not fall within entry .30 or entry 32 of List II. of Schedule VII of the Constitution. It falls within entry 45 or in any case under entry 97 of List I of Schedule VII under which only Parliament has power to pass the impugned legislation. Parliament had full competence and power to pass Chapter IIIC of the Reserve Bank of India Act, 1934." Mr. G. Viswanatha Iyer, learned counsel for the writ petitioners in WP. Nos. 508 and 534 of 1988 submits that Section 45B is violative of the fundamental right under Article 19(1)(g) of the Constitution as it restricts the number of depositors and the rate of interest under Section 4(2)(iii) of the Kerala oney Lenders Act, 1958 (hereinafter referred to as the Kerala Act). The two years period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns like appellants. It criticised the fraud played by such financial vultures. This approach was approved in Peerless General Finance and Investment Co. Ltd v. Reserve Bank of India, [1992] 2 SCC 343 @ 354. The learned counsel also draws our attention to the Nonbanking Financial Companies (Reserve Bank) Directions of 1966. They came into force on January 1, 1967. Clause 4 sub-clause (3) specifically provides that the deposit shall be reduced to 25 per cent of the paid-up capital for which two-year period was provided. Similar directions of 1977 known as Non Banking Financial Companies (Reserve Bank) Directions, 1977 came to be issued with effect from 1st of July, 1977. There were complaints, even then, that the financial companies were not paying interest regularly and the Reserve Bank was requested to help the depositor. Therefore, in the teeth of this provision, to say that suddenly the appellants and the writ petitioners are called upon to reduce, would work hardship and they should not be penalised, is incorrect. They took a calculated risk and, therefore, they had to suffer for their own fault. In examining the various submissions addressed on behalf of the appellants ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid." At page 988 it is held: "That would depend upon diverse fiscal and economic considerations based on practical necessity and administrative expediency and ,would also involve a certain amount of experimentation on which the Court would be least fitted to pronounce. The court would not have the necessary competence and expertise to adjudicate upon such an economic issue. The court cannot possibly assess or evaluate what would be the impact of a particular immunity or exemption and whether it would serve the purpose in view or not. There are so many imponderable that would enter into the determination that it would be wise for the court not to hazard an opinion where even economists may differ, The court must while examining the constitutional validity of a legislation of this kind, "be resilient, not rigid, forward looking, not stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n or funds are depleted to such an extent that the companies are not in a position to refund the deposits, it was accordingly considered necessary to control the activities of the companies when accepting deposits from the the public". We approve of the reasoning of the Delhi High Court in Kanta Mehta s case (supra). At pages 798-99 it runs as follows: "The danger of allowing deposits to be accepted without regulation is so acute and urgent, that to bind the hands of the Legislature that only one course alone is permissible and not to permit a play of joints would be to totally make it ineffective in meeting the challenge of the social evil. For, it must be remembered that "in the ultimate analysis, the mechanics of any economic legislation has necessarily to be left to the judgment of the executive and unless it is patent that there is hostile discrimination against a class, the processual basis of price fixation has to be accepted in the generality of cases as valid." See Prag Ice and Oil Mills v. Union of India, AIR 1978 SC 1296, para 50). Also such provisions meant to check such evil must be viewed, as Krishna Iyer J. said, through a socially constructive, not legally capt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no reason why the appellants and the writ petitioners cannot reduce the deposits. Further, non-banking financial companies are required under clause 4 sub-clause (3) as follows: "(3) Every non-banking financial company, not being a hire-purchase finance company, or a holding finance company, which on the date of commencement of these directions holds deposits in excess of twenty five per cent of its paid-up capital and free reserves shall secure before the expiry of a period of two years from the date of such commencement, by taking such steps as may be necessary for this purpose, that the deposits, received by the company and outstanding on its books are not in excess of the aforesaid limit." These directions came into force from 1st of January, 1967. Similar directions came to be issued as Miscellaneous Non- Banking Companies (Reserve Bank) Directions. Clause 5 dealing with acceptance of deposits states as under: "Acceptance of deposits by miscellaneous nonbanking companies: On and from 1st of July, 1977, no miscellaneous nonbanking company shall:- (a) receive any deposit repayable on demand or on notice, or repayable after a period of less than six months and more t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e proviso to Rule 3A (1) which required that with relation to the deposits maturing during the year ending on the 31 st day of March, 1979, the sum required to be deposited or invested under sub-rule 3A (1) shall be deposited or invested before the 30 th day of September, 1978. It was then contended that this provision would necessitate depositing 10% of the deposits maturing during the year ending 31 st March, 1979 which may have been accepted prior to the coming into force of rule 3A and to this extent the rule has been made retrospective and as there was no power conferred by sec. 58A to prescribe conditions subject to which deposits can be accepted retrospectively Rule 3A is ultra vires sec. 58A. Unquestionably, Rule 3A is to deposit 10% of the deposits maturing during the year in the manner prescribed in Rule 3. Some deposits would be maturing between April 1, 1978 and March 31, 1979. To provide for such marginal situation, a proviso is inserted. Does it to make the rule retroactive? Of course, not. In D.S. Nakara v. Union of India, [1983] 1 SCC 305 a Constitution Bench of this Court has, in this context, observed as under: "A statute is not properly called a retroactive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lled for to protect the public. While on the one hand these schemes encourage two vices affecting public economy, the desire to take quick and easy money and the habit of excessive and wasteful consumer spending, on the other hand the investors who generally belong to the gullible and less affluent classes have no security whatsoever. Action appears imperative." And paragraph 42 also requires to be quoted "I share my brother s concern about the mushroom growth of financial companies all over the country. Such companies have proliferated. The victims of the schemes, that the attractively put forward in public media, are mostly middle class and lower middle class people. Instances are legion where such needy people have been reduced penniless because of the fraud played by such financial vultures. It is necessary for the authorities to evolve fool-proof schemes to see that fraud is not allowed to be placed upon persons who are not conversant with the practice of such financial enterprises who pose themselves as benefactors of people." We may also add that this has been reaffirmed in Reserve Bank of India v. Timex Finance and Investment Co. Ltd., [1992] 2 SCC 344 at page 354. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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