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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 ..... 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 - Interestingly, Gujarat Act, 2011 tacitly recognizes the regulation of NBFCs under the RBI Act. Yet the State got the assent of only the Governor. The Kerala Act and the Gujarat Act will have no application to NBFCs registered under the RBI Act and regulated by RBI. Therefore, all the appeals filed by NBFCs against the judgment of the Kerala High Court are allowed. Likewise the appeals filed by the State of Gujarat against the judgment of the Gujarat high Court are dismissed. - CIVIL APPEAL NO. 523 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nacted, the concept of nonbanking financial companies was not very familiar in India. Therefore, the Reserve Bank of India and the Parliament had not stepped in to regulate financial companies which were not banks or banking companies. 3.2 It appears that after the mushroom growth of NBFCs, the Government of Kerala started insisting upon NBFCs to take a license under the Kerala Act, failing which penal consequences were threatened. Therefore, after unsuccessfully approaching the Government of Kerala for exemption, NBFCs filed a batch of writ petitions on the file of the High Court of Kerala. 3.3 A learned Judge of the High Court of Kerala dismissed the batch of writ petitions and the said order was confirmed by the Division Bench of the High Court. Therefore, NBFCs operating in the State of Kerala have come up with the above batch of appeals. 3.4 All the appeals, by the NBFCs operating in the State of Kerala, arise out of writ petitions seeking a declaration that NBFCs registered under the RBI Act will not come within the purview of the Kerala Act. Apart from several appeals, there is also a petition in Transfer Petition (Crl.) No.359 of 2015, filed by the Chief Executive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Entry No.43: incorporation, regulation and winding up of trading corporations including banking, insurance and financial corporations but not including cooperative societies. (iii) Entry No.45: Banking 4.2 List II (State List) of the Seventh Schedule contains an entry in Entry No.30, which reads: money lending and money lenders; relief of agricultural indebtedness . 4.3 Therefore, any State enactment regulating the business of money lending and intended to afford protection to borrowers, may fall under Entry No.30 of ListII. But at the same time any parliamentary enactment dealing with incorporation, regulation and winding up of financial corporations, would fall under Entry No.43 in ListI. 4.4 Therefore, at the outset, it is clear that the competence of the legislatures of the States of Kerala and Gujarat to enact a law for the regulation of the business of money lending cannot be questioned, as their power is traceable to Entry 30 of ListII of the Seventh Schedule. But at the same time, we will have to see whether after the enactment of a law by the Parliament for the incorporation and regulation of financial corporations, such financial corporations would conti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that Act or, (g) any other institution in the public sector, whether incorporated or not exempted by the Government by notification. Explanation I. Where a person, who carries ― on in the State of Kerala the Business of advancing and realising loans is resident outside the State, the agent of such person resident in the State shall be deemed to be the moneylender in respect of that business for the purposes of this Act. Explanation II. For the purposes of this ― Clause, clause (7A), Proviso to subsection (1) of section 3, clause (a) of subsection (3) of section10, [section 16B] and section 17, the word person shall include a firm or a joint family; 4.9 As seen from the definition, 7 different types of business entities are excluded from the definition of the expression money lending . A financial corporation which is not a bank and which is otherwise known as NBFC, is not listed as one of the entities excluded from the definition of the expression money lender . 4.10 A bank is excluded from the definition of the expression money lender , by virtue of clause (a). But the word bank is defined in Section 2(1A) as follows: Sec. 2 (1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition of the word banking contained in Section 5(b) of the Banking Regulation Act, 1949, an institution or business entity which does not accept deposits of money from the public, either for the purpose of lending or for the purpose of investment, will not be a banking company. While a banking company may be involved in both the business of accepting deposits and lending money, a financial institution which is engaged only in the business of lending, may not be covered by the definition of the expression banking company under the Banking Regulation Act, 1949. 4.14 Since NBFCs which do not accept deposits from the public do not come within the purview of the Banking Regulations Act, the Reserve Bank of India Act, 1934 had to step in. To make things more clear that there is no duplication of control, Section 45H of the RBI Act states that the provisions of Chapter IIIB shall not apply to a Banking Company as defined in Section 5 of the Banking Regulation Act. 4.15 But the definition of money lender in the Kerala Act excludes only a bank to which the Banking Regulation Act applies. It does not exclude a non banking institution from the definition. Therefore, the Kerala S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owers of inspection and search; (x) To empower the licensing authority to demand additional security from the money lender, if there is excess of liabilities over the assets of the money lenders at any time; and (xi) Providing for cancellation of licence, forfeiture of security and imposing penalty for violation of the provisions of the Act. 5. Gujarat Act 5.1 The Gujarat Act defines a money lender , in Section 2(10) to mean an individual, a HUF, a company, a pawnbroker or unincorporated company (i) who/which carries on the business of money lending in the State or (ii) who/which has his principal or subsidiary place of such business in the State . 5.2 The expression business of money lending is defined in Section 2(3) to mean the business of advancing loans, whether in cash or kind and whether or not in connection with or in addition to any other business and includes the business of payment of loan by an agreement under any law for the time being in force . 5.3 By virtue of the aforesaid definitions, the application of the Gujarat Act to any business entity/individual revolves around the definition of the word loan . It is defined in Section 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itution ( 1) established by or under an Act of Parliament or the legislature of a State, which grants any loan or advance in pursuance of the provisions of that Act, or (2) notified in this behalf by the State Government, in consultation with the Reserve Bank; 5.4 By virtue of the aforesaid definitions, the authorities under the Gujarat Act sought to apply the provisions of the Act to NBFCs also. Therefore, it is essential that we look at the scheme of the Act. 5.5 The broad scheme of the Gujarat Act is : (i) To provide for the registration of money lenders; (ii) To prohibit any person from carrying on the business of money lending without a valid certificate of registration in respect of the area concerned; (iii) To empower the Registrar General, Registrar and other officers appointed under the Act to require the production of records and documents and to carry out searches and seizures; (iv) To mandate every money lender to keep and maintain proper books of Accounts and other registers; (v) To make it obligatory for money lenders to file yearly statement of accounts of each of the debtors; (vi) To prohibit the disposal of any article take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 country to its advantage . 6.2 Therefore, in contrast to the state enactments regulating the business of money lending, whose oneeyed focus is only the protection of borrowers, the RBI Act takes a holistic approach to the business of banking, money lending and operation of the currency and credit system of the country. But when RBI Act was enacted, the business of banking and finance was not as complicated as it later turned out to be. 6.3 In the early 1960s, the Government found it necessary to regulate institutions which were not banks, but which were carrying on other businesses allied to banking. Therefore, a bill to amend the RBI Act, The Banking Companies Act, 1949, and the State Bank of India (Subsidiary Banks) Act, 1959 was introduced in November, 1963. The Statement of Objects and Reasons spelt out that the existing enactments relating to banks did not provide for any control over such banks or institutions and that therefore it was felt necessary that the RBI should be enabled to regulate the conditions on whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 clause (c) to mean any nonbanking institution which carries on the business of financing or the business of acquisition of shares, stocks etc., or the business of hirepurchase transactions. 6.5 Chapter IIIB as it was introduced by the Banking Laws (Miscellaneous Provisions Act), 1963, contained no spellbinding or pathbreaking provisions. Broadly, Chapter IIIB as it was originally introduced in 1963, (i) empowered RBI to regulate or prohibit the issue of prospectus or advertisement soliciting deposits of money; (ii) empowered the RBI to collect information from nonbanking institutions about deposits and to give directions; (iii) empowered the RBI to call for information from financial institutions and to give directions, for the purpose of regulating the credit system of the country; (iv) obliged the nonbanking institutions to furnish statements to the RBI; (v) provided for inspection by RBI; (vi) prescribed penalties for any violation and conferred overriding effect to Chapter IIIB over other laws. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rderly 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, disclosure requirements and other prudential norms; (iv) To consider the adequacy of the supervision and control of RBI over such institutions and suggest measures for further strengthening them; (v) To examine the adequacy of protection to depositors money; and (vi) To make recommendations on any other related matter. 6.9 The Working Group chaired by Dr. A.C. Shah, took note of the fact that the total number of NBFCs which stood at 7063 in 1981 increased to 24,009 by 1990 and that there were different categories of NBFCs operating in the country such as loan companies, investment companies, hirepurchase finance companies, equipment leasing companies, mutual benefit finance companies, miscellaneous finance companies, miscellaneous nonbanking companies, residuary nonbanking companies and housing finance companies. This Working Group actually recommended in paragraph 6.72 of its Report that though NBFCs were being regulated by the directions issued under Chapter IIIB of the RBI Act a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 regulation of the financial system of the country to its advantage or to prevent the affairs of any NBFC being conducted in a manner prejudicial to the interest of the depositors or prejudicial to the interest of the NBFC, RBI may determine the policy and give directions. Section 45K (i) RBI may demand every nonbanking institution to furnish such statements of information or particulars relating to or connected with the deposits received by the NBFCs. Section 45L (i) RBI will have the power to require financial institutions to furnish such statements, information or particulars relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 may determine the policy and give directions to all or any of the nonbanking financial companies relating to income recognition, accounting standards, making of proper provision for bad and doubtful debts, capital adequacy based on risk weights for assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts, 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 purpose of enabling it to regulate the credit system of the country to its advantage it is necessary so to do, it may (a) require financial institutions either generally or any group of financial institutions or fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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/directions. Title of the Circular/ directions The provision under which it was issued Subject matter in general ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company - Non-Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 And Sections 45JA, 45L and 45M of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rate of interest not to be usurious. This shall be subject to scrutiny by RBI change in rate of interest to be informed to borrower well in advance Ombudsman Scheme for NBFC- 2018 Section 45L Rule 8 empowers any person to file a complaint with the Ombudsman for the grounds mentioned in the rule. The procedure for filing a complaint is given in Rule 9. Rule 11 provides for settlement of the complaint by agreement between the parties. Rule 12 provides for the alternative where if the complaint is not settled by agreement, the Ombudsman can pass an award. Rule 14(4) 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which provides for such a type of control and supervision is not a complete code in itself, we do not know what else could be a complete code. 7.2 It was argued by Mr. Jaideep Gupta, learned senior counsel appearing for the State of Kerala that the Reserve Bank of India does not control the rate of interest charged by NBFCs on the loans advanced by them and that, therefore, a State enactment which seeks to control this aspect, namely, the rate of interest cannot be said to be repugnant. According to the learned senior counsel, a statutory enactment which does not deal with such an important issue as the rate of interest chargeable on the loans, cannot be said to be a complete code in itself. Reliance 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether Parliament intended to lay down an exhaustive Code in respect of the subject matter replacing the Act of the State legislature; and (iii) whether the law made by Parliament and the law made by State legislature occupy the same field. Therefore, more than supporting the case of the State, Deep Chand (supra) actually supports the case of the NBFCs, as we have found that Chapter IIIB is a complete code in itself. Doctrine of Eclipse, conflict and repugnancy 8. As indicated by the Constitution Bench in Deep Chand (supra), a law may be valid when made, but a shadow may be cast on it by supervening constitutional inconsistency or supervening existing statutory inconsistency. Assuming that the Kerala Act was valid 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , therefore, a direct conflict between two or more provisions of the competing statutes. In this sense, the inconsistency must be clear and direct and be of such a nature as to bring the two Acts or parts thereof into direct collision with each other, reaching a situation where it is impossible to obey the one without disobeying the other. This happens when two enactments produce different legal results when applied to the same facts. 51.7. Though there may be no direct conflict, a State law may be inoperative because the Parliamentary law is intended to be a complete, exhaustive or exclusive code. In such a case, the State law is inconsistent and repugnant, even though obedience to both laws is possible, because so long as the State law 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 Parl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clear that the RBI Act is traceable only to the Entries in ListI and the State enactments are traceable only to an Entry in ListII, the question of repugnancy under Article 254 does not arise, as has been held in Innoventive Industries Limited. But in cases of this nature, Article 246(1) would squarely apply. Article 246(1) reads as follows: 246. Subject matter of laws made by Parliament and by the Legislatures of States: (1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the Union List ). 8.4 In UCO Bank and Another vs. Dipak Debbarma and Others (2017)2 SCC 585 , a sale Notification issued 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 Democ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e have taken the above example only as a sample, for testing the validity of the argument of the learned counsel for the State and we find that the question of conflict does not go to the rescue of the State. Overriding Effect 10. Section 45Q which we have extracted elsewhere confers overriding effect upon Chapter IIIB, over other laws. Therefore, the States of Gujarat and Kerala cannot contend that the laws made by them are in addition to the provisions of Chapter IIIB. 10.1 Though it was contended by the learned counsel appearing for the State of Gujarat that the Gujarat Act exempts NBFCs registered under the RBI Act from seeking registration under the Gujarat Act, we do not think that the same would go to the rescue of State of Gujarat. Under Section 5(2) of the Gujarat Act, NBFCs 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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