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TMI Blog2014 (1) TMI 1639X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espondent No. 2 / BOB. 1. In this batch of writ petitions, the petitioners are assailing the constitutional validity of Section 2(1)(o) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as SARFAESI Act') as well as the legality of the Circular dated 1st July, 2013 of the Reserve Bank of India (hereinafter referred to as RBI'). Petitioner's submissions 2. Mr. Ramesh Singh, learned counsel for the petitioners, pointed out that Section 2(1)(o) of the SARFAESI Act defines Non-Performing Asset (for short, NPA') to mean an asset / account of a borrower, which had been classified by a bank / financial institution as sub-standard, doubtful or loss asset in accordance with the RBI guidelines relating to asset classification or similar guidelines issued by banks / financial institutions. He submitted that the SARFAESI Act did not define or even indicate any guideline for defining as to what is sub-standard, doubtful or loss asset. 3. According to him, the Parliament by delegating such an essential legislative function and that too, in an uncontrolled manner inter alia by not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ines therein. The contention of the learned counsel for the respondent that the statute indicates the guideline, namely, that the Commissioner's power to notify under Section 116(3) is only in respect of things which are of the same nature as would fall within the ambit of the expression land , as defined under Section 2(24), appears to be a classic case of post hoc ergo propter hoc. Obviously, the power given to the Commissioner under sub-section (3) of Section 116 is intended to be exercised only in a case where the plant or machinery does not fall within the ambit of the expression land or building as defined in the Act. It is only in such cases that the question of exercise of the discretion on the part of the Commissioner arises. Thus, the so-called guideline is wholly chimerical. 4. Mr. Ramesh Singh further submitted that Section 2(1)(o) was violative of Article 19(1)(g) of the Constitution of India as it gave uncontrolled discretion and arbitrary power in the hands of financial institutions / RBI to declare any entity as an NPA. He stated that under the SARFAESI Act, the borrower had a very limited right to question the proceedings and the consequences provided i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, which has no reasonable nexus. (iii) RBI guidelines, as far as it defines NPA, gives power to banks to decide when and under what circumstances an account is to be declared NPA, basing on the whims and fancies of the bank, which is not only unreasonable but also arbitrary. (iv) Under the provisions of the SARFAESI Act, the borrower has a very limited right to question the proceedings and the consequences provided in the Act are drastic. Union of India's submissions 8. On the other hand, Mr. Rajeeve Mehra, learned ASG for Union of India, stated that in the wake of the financial reforms undertaken by the Government of India based on the Narasimhan Committee Report I and II, prudential norms were introduced by the RBI to address credit monitoring process being pursued by banks and financial institutions. He contended that in order to reflect a bank's financial health in its balance-sheet and as per the recommendations made by the Committee on Financial System (Chairman Shri M. Narasimhan), the RBI had introduced, in a phased manner, prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the banks. 9. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tral Government under the SARFAESI Act, which were regulated by National Housing Bank. According to him, the NPAs of these institutions were, therefore, directed to be classified as per guidelines prescribed by National Housing Bank. 12. He pointed out that the plea of excessive delegation had not been pleaded in the writ petition. He submitted that the Parliament had not delegated any essential legislative function to RBI under Section 2(1)(o) of the SARFAESI Act. He referred to Sections 2(1)(j), (l), (o) and 13(2) of the SARFAESI Act to submit that NPA had been precisely defined and sufficient guidelines have been given to RBI to issue a Circular to classify the assets as sub-standard, doubtful and loss assets. Sections 2(1)(j), (l) and 13(2) of the SARFAESI Act are reproduced here-in-below:- 2. Definitions.-- (1) In this Act, unless the context otherwise requires,-- ... ... ... ... ... ... ... ... ... (j) default means non-payment of any principal debt or interest thereon or any other amount payable by a borrower to any secured creditor consequent upon which the account of such borrower is classified as non- performing asset in the bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant provisions of the Act in relation to the delegation made and the question as to whether the delegation is ultra vires or not will have to be decided by the application of the relevant tests. 14. Mr. Mehra also submitted that the Madras High Court in M/s. Signal Apparels Pvt. Ltd. v. Canara Bank decided on 06th July, 2010 taking into consideration Section 2(1)(o) of the SARFAESI Act as well as Clause 2.1 of the RBI guidelines had held that the action of the Bank was not arbitrary or unreasonable in declaring the assets of the defaulter as NPAs. The High Court of Madras after considering the guidelines issued by the RBI in 2004 (as applicable at that point of time) wherein an account was declared as an NPA, if the borrower had not produced any income for the secured creditor for more than 180 days (as applicable at that time) and also there was a default on the part of the borrower as provided under Section 13(2) of the SARFAESI Act, which was analogous to the facts of the present cases had found no merit to interfere with the impugned notice and was pleased to dismiss the writ petition. 15. Mr. Mehra submitted that, in any event, the present writ petitions were not ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons. 21. According to her, continuous growth of NPAs threatened repayment capacity of banks and this had an adverse impact on the financial strength of banks which, in the present era of globalisation, were required to conform to international standards. Thus, according to her, the legislature had defined an NPA to mean an asset or account receivable of a borrower, which had been classified by banks or financial institutions in terms of the RBI guidelines as sub-standard, doubtful and loss. These guidelines were issued to improve quality of assets of the banks and to recover the public money speedily. The impugned guidelines of the RBI were not to eliminate NPAs, but to restructure them. Preamble as well as the impugned provisions and circular 22. Having heard the learned counsel for the parties at length, we are of the view that it would be worthwhile to reproduce the impugned provision of the SARFAESI Act, which reads as under:- 2. Definitions.- (1) In this Act, unless the context otherwise requires,- ... ... ... ... ... ... ... ... ... (o) non-performing asset means an asset or account of a borrower, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has remained nonperforming and the realisability of the dues: i. Substandard Assets ii. Doubtful Assets iii. Loss Assets 4.1.1 Substandard Assets With effect from March 31, 2005, a sub-standard asset would be one, which has remained NPA for a period less than or equal to 12 months. Such an asset will have well defined credit weaknesses that jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. 4.1.2 Doubtful Assets With effect from March 31, 2005, an asset would be classified as doubtful if it has remained in the sub-standard category for a period of 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, - on the basis of currently known facts, conditions and values - highly questionable and improbable. 4.1.3 Loss Assets A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. In other w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounting levels of non-performing assets of banks and financial institutions. Narasimham Committee I and II and Andhyarujina Committee constituted by the Central Government for the purpose of examining banking reforms have considered the need for changes in the legal system in respect of these areas. These Committees, inter alia, have suggested enactment of a new legislation for securitisation and empowering banks and financial institutions to take possession of the securities and to sell them without the intervention of the court. The provisions of the Ordinance would enable banks and financial institutions to realise long-term assets, manage problem of liquidity, asset liability mismatches and improve recovery by exercising powers to take possession of securities, sell them and reduce non-performing assets by adopting measures for recovery or reconstruction. 2. It is now proposed to replace the Ordinance by a Bill, which, inter alia, contains provisions of the Ordinance to provide for - (h) empowering banks and financial institutions to take possession of securities given for financial assistance and sell or lease the same or take over management in the event of default, i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... individual or class and yet the law hits only a particular individual or class. (3) The principle of equality does not mean that every law must have universal application for all persons who are not by nature, attainment or circumstances in the same position and the varying needs of different classes of persons often require separate treatment. (4) The principle does not take away from the State the power of classifying persons for legitimate purposes. (5) Every classification is in some degree likely to produce some inequality and mere production of inequality is not enough. (6) If a law deals equally with members of a well defined class, it is not obnoxious and it is not open to the charge of denial of equal protection on the ground that it has no application to other person. (7) While reasonable classification is permissible, such classification must be based upon some real and substantial distinction bearing a reasonable and just relation to the object sought to be attained and the classification cannot be made arbitrary and without any substantial basis. Thus, the Apex Court, in the above cited judgment, has laid down the guidelines when the classification i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions. The Court must defer to legislative judgment in matters relating to social and economic policies and must not interfere, unless the exercise of legislative judgment appears to be palpably arbitrary. (emphasis supplied) 31. The constitutional vires of Sections 13, 15, 17 and 34 of the SARFAESI Act fell for consideration before the Supreme Court in Mardia Chemicals Ltd. and Ors. v. Union of India and Ors., (2004) 4 SCC 311. It was contended before the Apex Court that the SARFAESI Act vested arbitrary powers in the banks without any guidelines for the exercise thereof and also without appropriate and adequate mechanism to decide the disputes relating to the correctness of the demand. While dealing with constitutionality of the impugned provisions therein, the Apex Court, with regard to Section 2(1)(o) of the Act, held that declaring an asset as NPA is not based on the whims and fancies of bank and financial institutions but basing on the guidelines issued by the Reserve Bank of India and upheld the provisions and guidelines. The observations of the Apex Court in Mardia Chemicals Ltd.'s case (supra), in our opinion, provide complete answer to the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39; concept, with effect from 31-3- 2001. Accordingly, as from that date, a non-performing asset (NPA) shall be an advance where (i) interest and/or instalment of principal remain overdue for a period of more than 180 days in respect of a term loan, (ii) the account remains ‗out of order' for a period of more than 180 days, in respect of an overdraft/cash credit (OD/CC), (iii) the bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted, (iv) interest and/or instalment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and (v) any amount to be received remains overdue for a period of more than 180 days in respect of other accounts. 4.2.2. Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high-value accounts. The banks may fix a minimum cut-off point to decide what would constitute a high-value account depending upon their respective business levels. The cut- off point should be valid for the entire acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... power is, however, subject to one important limitation. The legislature cannot delegate essential legislative functions, which consist in the determination or choosing of the legislative policy and of formally enacting that policy into a binding rule of conduct. The legislature cannot delegate uncanalised and uncontrolled power ; the power delegated must not be unconfined and vagrant , but must be canalised within banks that keep it from overflowing . The banks , that set the limits of the power delegated, are to be constructed by the legislature by declaring the policy of the law and by laying down standards for guidance of those on whom the power to execute the law is conferred. So, the delegation is valid only when the legislative policy and guidelines to implement it are adequately laid down and the delegate is only empowered to carry out the policy within the guidelines laid down by the legislature. (See: Principles of Statutory Interpretation by Justice G.P. Singh, 13th Edition 2012). 36. The question, whether any particular legislation suffers from excessive delegation, has to be decided having regard to the subject-matter, the scheme, the provisions of the statute in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egation is valid only when the legislative policy and guidelines to implement it are adequately laid down and the delegate is only empowered to carry out the policy within the guidelines laid down by the legislature. The legislature may, after laying down the legislative policy, confer discretion on an administrative agency as to the execution of the policy and leave it to the agency to work out the details within the framework of the policy. When the Constitution entrusts the duty of law-making to Parliament and the legislatures of States, it impliedly prohibits them to throw away that responsibility on the shoulders of some other authority. An area of compromise is struck that Parliament cannot work in detail the various requirements of giving effect to the enactment and, therefore, that area will be left to be filled in by the delegatee. Thus, the question is whether any particular legislation suffers from excessive delegation and in ascertaining the same, the scheme, the provisions of the statute including its preamble, and the facts and circumstances in the background of which the statute is enacted, the history of the legislation, the complexity of the problems which a mode ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eaning of the offending statute. This aspect of the matter has been considered in some detail in People's Union for Civil Liberties v. Union of India [(2004) 2 SCC 476] and Andhra Bank v. B. Satyanarayana [(2004) 2 SCC 657 : 2004 SCC (L S) 433] in which one of us was a member. (emphasis supplied) 41. In Delhi Race Club Limited v. Union of India and Ors., (2012) 8 SCC 680, after revisiting the law on the issue of constitutionality of the delegated legislation, the Supreme Court held as under:- 30. From the conspectus of the views on the question of nature and extent of delegation of legislative functions by the legislature, two broad principles emerge viz. (i) that delegation of non-essential legislative function of fixation of rate of imposts is a necessity to meet the multifarious demands of a welfare State, but while delegating such a function laying down of a clear legislative policy is prerequisite, and (ii) while delegating the power of fixation of rate of tax, there must be in existence, inter alia, some guidance, control, safeguards and checks in the Act concerned. It is manifest that the question of application of the second principle will not arise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt gives great latitude to the legislature when adjudging its constitutionality, a very different approach has to be adopted by the Court where the question of civil liberties and the fundamental rights under Part III of the Constitution arise. ... As regards economic and other regulatory legislation, judicial restraint must be observed by the Court and greater latitude must be given to the legislative while adjudging the constitutionality of the statute, because the court does not consist of economic or administrative experts. It has no experience in these matters and in this age of specialization, when policies have to be laid down with great care after consulting the specialities in the field, it will be wholly unwise for the court to encroach into the domain of the executive or legislature and try to enforce its views and perception.‖ The Judgment of the Supreme Court of the U.S. crystallises the scope of judicial review in matters of economic and financial sector and with regard to presumption of constitutionality of the statute. Parliament while enacting SARFAESI Act has not delegated essential legislative function; validity of Section 2(1)(o) of the SARFAE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct sought to be achieved. 48. A reading of the RBI Circular dated 01st July 2013 makes it amply clear that every NPA would fall either in the category of sub-standard or doubtful or loss asset. Thus, the submission of learned counsel for the petitioners that a sub-standard asset may not fall in the definition of NPA is not correct as in all cases where there has been default in repayment of interest and / or principal beyond ninety days, the account would be a sub- standard account and would also be covered by the definition of NPA. 49. We are also of the view that 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. 50. 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 violati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n fiscal matters and / or where discretion is conferred on high ranking statutory authorities like the RBI, should not ordinarily be interfered with in exercise of power of judicial review. 53. The judgment of Krishna Mohan (P) Ltd.'s case (supra), referred to by learned counsel for petitioners, is clearly inapplicable to the facts of the present cases, as in the said case, the Court had held that there was hardly any distinction between the situation envisaged by the Supreme Court in New Manek Chowk [AIR 1967 SC 1801] and the one before them in that case. The vice discovered by the Supreme Court in Rule 7(2) framed under the BPMC Act, 1949 equally affected Section 116(3) of the DMC Act. The order of the Gujarat High Court and the interim order passed by the Supreme Court offer no assistance to the petitioners as in the said petitions, the constitutionality of Section 2(1)(o) was not challenged. From a reading of the Gujarat High Court order dated 08th July, 2013, it transpires that the guidelines issued by the regulator of a group of financial institutions has been challenged being arbitrary, discriminatory and violative of Article 14 of the Constitution. Conclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X
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