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TMI Blog2022 (5) TMI 702X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies (for short "NBFCs") regulated by the Reserve Bank of India, in terms of the provisions of Chapter IIIB of the Reserve Bank of India Act, 1934 (hereinafter referred to as "RBI Act") could also be regulated by State enactments such as Kerala Money Lenders Act, 1958 (hereinafter referred to as "Kerala Act") and Gujarat Money Lenders Act, 2011 (hereinafter referred to as "Gujarat Act"), has arisen for our consideration in these appeals, with the Kerala and Gujarat High Courts taking opposite views. 2. We have heard the learned counsel for the respective parties, the learned senior counsel appearing for the State of Kerala, the learned standing counsel appearing for the State of Gujarat and the learned counsel appearing for RBI. FACTUAL MATRIX 3. A brief sojourn into the factual matrix may provide the setting, in the context of which, the above question of law has arisen. It goes as follows: KERALA 3.1 The legislature of the State of Kerala passed the Kerala Act, 1958, with the professed object of providing for the regulation and control of the business of money lending in the State of Kerala. The statement of objects and reasons spelt out, that by passing the said ena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vernor on 6.04.2011 and was published in the Gujarat Government Gazette on 8.04.2011. 3.7 Therefore, a fresh batch of special civil applications were filed, seeking a declaration that the provisions of the Gujarat Act 14 of 2011 are not applicable to NBFCs registered under the RBI Act. The Division Bench of the High Court allowed the special civil applications holding that Gujarat Act 14 of 2011 is ultra vires the Constitution for legislative incompetence, to the extent that it seeks to have control over NBFCs registered under the RBI Act. A consequential direction was also issued by the Gujarat High Court restraining the State Government from applying the provisions of the Gujarat Act against NBFCs registered under the RBI Act. Therefore, the State of Gujarat has come up with Civil Appeals. Scheme of Kerala Act, Gujarat Act and RBI Act 4. In the background of the facts narrated above, the legal issue arising for consideration has to be resolved by looking at the scheme of the two State enactments, the scheme of RBI Act and the relevant Entries in the appropriate List of the Seventh Schedule, to which these enactments can be traced. 4.1 ListI of the Seventh Schedule to the Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a "money lender" as follows:9 "2. Definitions. xxx xxx xxx (7) "moneylender" means a person whose main or subsidiary occupation is the business of advancing and realising loans or acceptance of deposits in the course of such business and includes any person appointed by him to be in charge of a branch office or branch offices or a liaison office or any other office by whatever name called, of his principal place of business and a pawn broker, but does not include ( a) a bank or a cooperative society; or (b) the Life Insurance Corporation of India established under section 3 of the Life Insurance Corporation Act, 1956 (Central Act 31 of 1956); or (bb) the Industrial Credit and Investment Corporation of India Limited incorporated under the India Companies Act, 1913 (7 of 1913); (c) the Industrial Finance Corporation established under section 3 of the Industrial Finance Corporation Act, 1948 (Central Act 15 of 1948); or (d) x x x x (e) the State Financial Corporation established under section 3 of the State Financial Corporation Act, 1951 (Central Act 63 of 1951); or (f) any institution established by or under an Act of Parliament or the Legislature of a Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t established under the National Bank for Agriculture and Rural Development Act, 1981 (Central Act 61 of 1981); (x) the Industrial Reconstruction Bank of India established under the Industrial Reconstruction Bank of India Act, 1984 (Central Act 62 of 1984); 4.11 The Banking Regulation Act, 1949 defines a "banking company" under Section 5(c) as follows: " 5. Interpretation - xxx xxx xxx (c) "banking company" means any company which transacts the business of banking in India; Explanation. Any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this clause;" 4.12 The word "banking" itself is defined in Section 5(b) of the Banking Regulation Act, 1949 as follows:12 "5. Interpretation - xxx xxx xxx (b) "banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise;" 4.13 By virtue of the definitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heme of the Kerala Act is: (i) To make it obligatory for a money lender to obtain a licence under the Act; (ii) To prohibit any person from carrying on or continuing the business of money lending without licence; (iii) To prevent money lenders from charging interest at a rate higher than the rate prescribed under the Act; (iv) To prevent money lenders from giving any gifts, commissions or presents other than the interest provided in Section 4(2) to any depositor; (v) To enable the debtor to deposit the money due in respect of a loan, into any Court having jurisdiction to entertain a suit for recovery of the loan and to seek the recording of full or part satisfaction of the loan; (vi) To make it mandatory for money lenders to keep books of accounts and to give receipts; (vii) To make it compulsory for a pawn broker to issue a pawn ticket, the possession of which will give rise to a presumption that the holder of the pawn ticket has a right to redeem the pledge; (viii) To prescribe the procedure for redemption of pledge, sale of pledge and compensation for depreciation of pledge; (ix) To appoint inspectors with certain powers of inspection and search; (x) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to his credit in the fund in accordance with the rules of the fund; (g) a loan to or by an insurance company as defined in the Insurance Act, 1938; (h) a loan advanced by a Government company as defined in the Companies Act, 1956; (i) an advance made bona fide by any trader carrying on any business, other than moneylending, if such advance is made in the regular course of such business; (j) a loan advanced by the National Bank for Agriculture and Rural Development established under the National Bank for Agriculture and Rural Development Act, 1981; (k) a loan advanced by the Export Import Bank of India established under the ExportImport Bank of India Act, 1981; (l) a loan advanced by the Small Industries Development Bank of India, established under the Small Industries Development Bank of India Act, 1989; (m) a loan advanced by the National Housing Bank, constituted under the National Housing Bank Act, 1987 ; (n) a loan advanced by State Financial Corporations established under the State Financial Corporations Act, 1951 ; and (o) a loan advanced by any institution ( 1) established by or under an Act of Parliament or the legislature of a State, which grants ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r overwriting; and (xvi) To provide for penalties for contravention of the provisions of the Act. 5.6 It may be of interest to note that Section 39 of the Gujarat Act contains a very strange provision which reads as follows:" Notwithstanding anything contained in this Act or any other law for the time being in force, no money lender shall recover the principal of the loan advanced by him or the interest thereon either in part or in whole except in cash." 5.7 Though we are not concerned with the validity of such a provision we could not resist the temptation to take note of the said provision which is in the teeth of Section 269SS of the Income Tax Act, 1961. 6. Role of RBI, the scheme of Chapter IIIB of the RBI Act and the Regulatory measures taken by RBI from time to time 6.1 As observed by this Court in Internet and Mobile Association of India vs. Reserve Bank of India (2020) 10 SCC 274, "the role of a Central Bank such as the Reserve Bank, in an economy, is to manage (i) the currency; (ii) the money supply and (iii) interest rates". One of the objects the Reserve Bank of India Act, 1934 as spelt out in its preamble is "to operate the currency and credit system of the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of better or more effective control of credit, and (ii) the regulation of the business of acceptance of deposits by these and other nonbanking institutions, in the public interest. The Reserve Bank will be empowered to provide, by general or special order, for the forms in which returns and information are to be furnished to it, and also to give directions to any class of institutions or to any institution in particular for the purposes specified. The Reserve Bank will also be enabled to carry out inspections, where necessary, for carrying out the purposes of the new Chapter." 6.4 Accordingly, the Banking Laws (Miscellaneous Provisions Act), 1963, was enacted, amending the provisions of the aforesaid three Parliamentary enactments. It was by this amendment which came into force on 01.02.1964 that Chapter IIIB was inserted in RBI Act. The Chapter heading for this Chapter read as, "Provisions Relating to NonBanking Institutions Receiving Deposits and Financial Institutions". However, this Chapter IIIB was made inapplicable under Section 45H to a banking company as defined in Section 5 of the Banking Companies Act, 1949. Section 45I defined a 'financial institution' under clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e financial sector in particular. In order to make an indepth study of the role of NBFCs and to suggest regulatory and control measures to ensure healthy growth and operations of these companies, RBI constituted a Working Group under the Chairmanship of Dr. A.C. Shah, in May, 1992. The terms of reference of the Working Group in simple terms Report of the Working Group on Financial Companies C.R. 483 submitted in September, 1992 were: (i) To review the role of various categories of nonbanking financial intermediaries; (ii) To review the provisions of the RBI Act, 1934; NonBanking Financial Companies (Reserve Bank) Directions 1977, Miscellaneous NonBanking Companies (Reserve Bank) Directions, 1977; Residuary NonBanking companies (Reserve Bank) Directions, 1987; The National Housing Bank Act, 1987 and The Housing Finance Companies (NHB) Directions, 1989; (iii) To enquire into the methods of operation of nonbanking financial intermediaries and to recommend measures for ensuring their orderly growth and in particular, the eligibility criteria for their entry, growth and exit, their viability, capital adequacy, liquidity ratio, debt equity ratio, credit concentration ratio, disclos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h shall not be less than 5% or such higher percentage not exceeding 25% prescribed by RBI. (ii) Every NBFC should furnish a return to RBI, so as to ensure compliance with the provisions of this Section. (iii) Penal interest is liable to be levied if there was a shortfall in the investment. Section 45IC (i) Every NBFC should create a reserve fund and transfer to the said fund a sum not less than 20% of its net profit every year. No part of the reserve fund shall be appropriated by the NBFC except for a purpose stipulated by RBI. Section 45ID (i) RBI is entitled to remove the Director of an NBFC from office, if it is satisfied that it is necessary to do so in public interest or to prevent the affairs of a NBFC being conducted in a manner detrimental to the interest of the depositors or creditors or financial stability or for securing the proper management of such company. Section 45IE (i) RBI will have the power of supersession of the Board of Directors of a NBFC in public interest etc. Section 45J (i) RBI will have the power to regulate or prohibit the issue of prospectus or advertisement soliciting deposits of money. Section45JA (i) In public interest or for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant provisions of Chapter IIIB. 6.13 A Nonbanking financial company is defined in clause (f) of Section 45I as follows: " 45I. (f) "nonbanking financial company" means - (i) a financial institution which is a company; (ii) a nonbanking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner; (iii) such other nonbanking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify." 6.14 Section 45JA which gives power to the RBI to determine the policy and issue directions, reads as follows: " 45JA. Power of Bank to determine policy and issue directions. (1) If the Bank is satisfied that, in the public interest or to regulate the financial system of the country to its advantage or to prevent the affairs of any nonbanking financial company being conducted in a manner detrimental to the interest of the depositors or in a manner prejudicial to the interest of the nonbanking financial company, it is necessary or expedient so to do, it ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r generally or to any nonbanking institution or group of nonbanking institutions in particular, in respect of any matters relating to or connected with the receipt of deposits, including the rates of interest payable on such deposits, and the periods for which deposits may be received. (4) If any nonbanking institution fails to comply with any direction given by the Bank under subsection (3), the Bank may prohibit the acceptance of deposits by that nonbanking institution. 1[***] (6) Every nonbanking institution receiving deposits shall, if so required by the Bank and within such time as the Bank may specify, cause to be sent at the cost of the nonbanking institution a copy of its annual balancesheet and profit and loss account or other annual accounts to every person from whom the nonbanking institution holds, as on the last day of the year to which the accounts relate, deposits higher than such sum as may be specified by the Bank." 6.16 Section 45L empowers RBI to call for information and to give directions. It reads as follows: " 45L. Power of Bank to call for information from financial institutions and to give directions. (1) If the Bank is satisfied for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... registration) till the time of their commercial death (by way of winding up), all activities of NBFCs automatically come under the scanner of RBI. As a consequence, the single aspect of taking care of the interest of the borrowers which is sought to be achieved by the State enactments gets subsumed in the provisions of Chapter IIIB. Regulations/Master Circulars/Directions issued by RBI from time to time 6.20 Apart from the provisions of Chapter IIIB, the regulations, directions and Master Circulars issued by RBI from time to time, also bind the NBFCs. There is a long list of Regulations/directions or Master Circulars issued by RBI from 1977 onwards, which shows that even before the 1997 Amendment to the RBI Act, some kind of control was exercised by RBI over NBFCs. After the 1997 amendment, every aspect of the business of NBFCs, including loans, is covered by Master Circulars/ Directions issued by RBI. In other words, the only field occupied by the State enactments stand appropriated by the Master Circulars/Directions. For demonstrating that even the subject of grant of loans is covered by these Master Circulars/Directions, we present in the Table below, the relevant circulars/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the RBI Act Chapter IV: Prudential Regulations Clause 11: Need for policy on demand/call loans : Board of Directors shall frame policy for applicable NBFCs which stipulate: 1. Cut-off date for repayment of demand or call loan shall be demanded with reasons in Non-Banking Financial Company-Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 * writing if the cut-off date extends beyond a period of 1 year from date of sanction. 2. Rate of interest which shall be payable on such loans. Such interest shall be payable either at monthly or quarterly rests. Reasons in writing if moratorium is granted or no interest is stipulated. Chapter V: Fair Practices Code for applicable NBFC Clause 28: Applications for loans & their processing Communications to borrower to be in vernacular language/language understood by them. Loan application forms to include necessary information which affects interest of the borrower & to indicate documents required to be submitted. To devise a system of giving acknowledgement for receipt of all loan applications with time frame within which applications will be disposed of. Clause 29: Loan A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) also mandates that the NBFC must implement the award and send a report of the same to RBI within 15 days of the award becoming final Since the Regulations, Master Circulars and Directions issued by RBI are binding on NBFCs, it is clear from the above that all aspects of NBFCs are regulated by RBI and nothing is left untouched. However, there are certain categories of NBFCs, which may be exempt, by RBI itself, in exercise of the power conferred by section 45NC of the Act, from the application of the provisions of RBI Act. Let us also take note of them now. NBFCs Exempt from RBI Act 6.21 Section 45NC of the RBI Act confers power upon the RBI to declare by notification in the Official Gazette, that any or all of the provisions of Chapter IIIB shall not apply to a NBFC or any class of NBFCs, either generally or for a specified period, subject to such restrictions, limitations and conditions. In exercise of the power so conferred, RBI has been issuing Master Directions from time to time. A Master Direction issued on 25.08.2016, updated as on April 01, 2022 lists various categories of NBFCs exempt from the application of certain specified provisions of Chapter IIIB. This is for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce was placed by the learned senior counsel in this regard on a Constitution Bench decision of the Supreme Court in Deep Chand vs. State of U.P AIR 1959 SC 648. 7.3 But we do not agree. NBFCs which play a very vital role in contributing to the financial health of the country and whose operations are controlled by RBI with the avowed object of operating the currency and credit system of the country to its advantage, have as their life line, the income received by way of interest on the loans advanced. Therefore, to say that RBI has no say in such a matter of vital interest, will strike at the very root of the statutory control vested in RBI. 7.4 It may be true that many times RBI may not be controlling the rate of interest charged by NBFCs on the loans advanced by them. It does not mean that they have no power to step in. The power to determine policy and issue directions, available under Section 45JA can always be invoked by RBI. 7.5 However, it was contended by Mr. Jaideep Gupta, learned senior counsel for the State of Kerala that the power of the RBI under Section 45JA to determine the policy and give directions, are circumscribed by the words "relating to income recognition, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its application to NBFCs when it was made, on the ground that the business of money lending is traceable to Entry 30 of List II, it has to give way for the parliamentary enactment. The moment the Parliament stepped in to codify the law relating to registration and regulation of NBFCs, by inserting certain provisions in Chapter IIIB of the RBI Act, the same would cast a shadow on the applicability (even assuming it is applicable) of the provisions of the Kerala Act to NBFCs registered under the RBI Act and regulated by RBI. 8.1 In Innoventive Industries Limited vs. ICICI Bank and Anr. (2018) 1 SCC 407, this Court was concerned with a professed conflict between the Insolvency and Bankruptcy Code, 2016 and the Maharashtra Relief Undertakings (Special Provisions) Act, 1958. After taking note of Section 107 of the Government of India Act, 1935 and Article 254 of the Constitution, this Court analysed the Constitutions of other jurisdictions on the question of inconsistency of laws and summarized the propositions of law as follows: "51. The case law referred to above, therefore, yields the following propositions : 51.1. Repugnancy under Article 254 arises only if both the Parlia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is referable to the same subjectmatter as the Parliamentary law to any extent, it must give way. One test of seeing whether the subjectmatter of the Parliamentary law is encroached upon is to find out whether the Parliamentary statute has adopted a plan or scheme which will be hindered and/or obstructed by giving effect to the State law. It can then be said that the State law trenches upon the Parliamentary statute. Negatively put, where Parliamentary legislation does not purport to be exhaustive or unqualified, but itself permits or recognises other laws restricting or qualifying the general provisions made in it, there can be said to be no repugnancy. 51.8. A conflict may arise when Parliamentary law and State law seek to exercise their powers over the same subjectmatter. This need not be in the form of a direct conflict, where one says "do" and the other says "don't". Laws under this head are repugnant even if the rule of conduct prescribed by both laws is identical. The test that has been applied in such cases is based on the principle on which the rule of implied repeal rests, namely, that if the subjectmatter of the State legislation or part thereof is identical with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the Securitisation Act was challenged on the ground that it constituted an infraction of Tripura Land Revenue and Land Reforms Act, 1960. This Court found that the Securitisation Act is traceable to Entry45 of ListI and the Tripura Act is traceable to Entries 18 and 45 of the State List. After referring to the Constitution Bench decision in State of West Bengal and Others vs. Committee for Protection of Democratic Rights, West Bengal and Others (2010) 3 SCC 571 and other decisions, this Court held that the Securitisation Act, being a Parliamentary legislation is the dominant legislation. To come to the said conclusion, this Court referred to the nonobstante clause in Article 246(1). 8.5 Many times, this Court has invoked the doctrine of eclipse, in relation to preconstitutional laws with reference to Article 13(1) of the Constitution. But in later years, this doctrine came to be used even in different contexts. For instance in Kailash Sonkar vs. Smt. Maya Devi (1984) 2 SCC 91, this Court invoked the doctrine of eclipse to hold that when a person is converted to Christianity or other religion, the original caste remains under eclipse and that as soon as during his life time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FCs registered under the RBI Act are deemed to have been registered under the Gujarat Act. Therefore, all other provisions of the Gujarat Act are sought to be applied to NBFCs operating in the State of Gujarat. The other provisions of the Gujarat Act include the (i) power of search and seizure; (ii) requirement to maintain certain books and registers and to furnish statements; and (iii) the mandate not to dispose of any article taken from a debtor as a pawn, pledge or security, before a period of two years from the date stipulated for final payment, etc. The Gujarat Act also empowers the Civil Court under Section 30 to reopen certain transactions and to limit the interest recoverable. Section 32 of the Gujarat Act empowers the borrower to deposit the money before a Civil Court and the civil Court to assume jurisdiction of the adjudication of the dispute. 10.2 Interestingly, Gujarat Act, 2011 tacitly recognizes the regulation of NBFCs under the RBI Act. Yet the State got the assent of only the Governor. Conclusion 11 In view of the above, we are of the considered opinion that the Kerala Act and the Gujarat Act will have no application to NBFCs registered under the RBI Act and regu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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