NEDUMPILLI FINANCE COMPANY LIMITED VS STATE OF KERALA

NEDUMPILLI FINANCE COMPANY LIMITED VS STATE OF KERALA CASE

Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले



    REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION/
CRIMINAL ORIGINAL JURISDICTION 
CIVIL APPEAL NO. 5233 0F 2012
NEDUMPILLI FINANCE COMPANY LIMITED … APPELLANT(S)
VERSUS
STATE OF KERALA & ORS.                              …  RESPONDENT(S)
WITH
CIVIL APPEAL NO. 5230 OF 2012
CIVIL APPEAL NO. 5190 OF 2012
CIVIL APPEAL NO. 5191 OF 2012
CIVIL APPEAL NO. 5184 OF 2012
CIVIL APPEAL NO. 5241 OF 2012
CIVIL APPEAL NO. 5185 OF 2012
CIVIL APPEAL NO. 5111 OF 2012
CIVIL APPEAL NO. 5188 OF 2012
CIVIL APPEAL NO. 5187 OF 2012
1
CIVIL APPEAL NO. 5183 OF 2012
CIVIL APPEAL NO. 5113 OF 2012
CIVIL APPEAL NO.3857 OF 2022
(@Special Leave Petition (Civil) No.8331 of 2015)
TRANSFER PETITION (CRL.) NO. 359 OF 2015
CIVIL APPEAL NO. 5186 OF 2012
CIVIL APPEAL NO. 5192 OF 2012
CIVIL APPEAL NO. 5189 OF 2012
CIVIL APPEAL NO. 5112 OF 2012
CIVIL APPEAL NO. 5232 OF 2012
CIVIL APPEAL NO. 5231 OF 2012
CIVIL APPEAL NO. 5234 OF 2012
CIVIL APPEAL NO. 5237 OF 2012
CIVIL APPEAL NO. 5238 OF 2012
CIVIL APPEAL NO. 5315 OF 2012
CIVIL APPEAL NOS. 18786­18787 OF 2017
CIVIL APPEAL NO. 1324 OF 2015
CIVIL APPEAL NO. 7836 OF 2012
2
J U D G M E N T
V. RAMASUBRAMANIAN, J.
1. The question as to whether Non­Banking Financial 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.
3
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
enactment, “it was intended to regulate the interest to be charged by
money lenders and to provide protection to borrowers”. At the time
when this Act was enacted, 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
4
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
Officer of one NBFC by name Bajaj Finance Limited, seeking a
transfer of the quash petition pending on the file of the High Court
of Kerala under Section 482 of the Code of Criminal Procedure
praying for quashing an FIR registered under the Kerala Act.
GUJARAT
3.5 The Bombay Money Lenders Act, 1946, which was applicable
in the State of Gujarat, was sought to be invoked by the Registrar in
the   office   of   the   Prevention   of   Money   Lenders,   against   NBFCs
5
operating in the State of Gujarat, in the year 2009. Challenging the
action so initiated, NBFCs filed a batch of special civil applications
before the High Court of Gujarat. When it was pending, the decision
of the Kerala High Court came. But disagreeing with the view taken
by the Kerala High Court, a learned Judge of the Gujarat High
Court quashed the notices issued to the NBFCs under the Bombay
Money Lenders Act, by a judgment dated 13.01.2010. 
3.6 Thereafter, the legislature of the State of Gujarat passed the
Gujarat Act, 2011 (Gujarat Act 14 of 2011) which received the
assent of the Governor 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
6
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 Constitution contains
three entries which may be taken note of.  They are:­
(i) Entry No.38: Reserve Bank of India
(ii) 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”.
7
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 continue to be regulated also by the
State enactments, on the ground that they may also fall within the
definition   of   the   expression   “money   lenders”   under   the   State
enactments.
8
4.5 For finding an answer to the above question, it may be useful
to take a bird’s eye view of the scheme of the Kerala and Gujarat
State enactments.
Broad scheme of Kerala Act
4.6 In a way, the Kerala  Act  is a legacy of the Madras Pawn
Brokers Act, 1943, whose provisions continued to be in force in the
Malabar District, even after the States Reorganisation Act, 1956,
until it was repealed by Kerala Money Lenders (Amendment) Act 33
of 1963.
4.7 As seen from the statement of objects and reasons, the only
object of the Kerala Money Lenders Act was to afford protection to
borrowers   from   unscrupulous   money   lenders   who   advanced
usurious   loans.   Though   it   was   proclaimed   in   the   statement   of
objects,   in   general   terms,   that   it   was   intended   to   regulate   the
business of money lending, the Act was primarily intended only to
cover one aspect of the business of financing.
4.8 Section 2(7) of the Kerala Act, defines 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 State, which grants
any loan or advance in pursuance of the provisions of
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.
10
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 (1A) “bank” means­
(i) a banking company to which the Banking Regulation
Act, 1949 (Central Act 10 of 1949), applies;
(ii) the   State   Bank   of   India   constituted   under   the   State
Bank of India Act, 1955 (Central Act 23 of 1955);
(iii)  a subsidiary bank as defined in clause (k) of section of
the State Bank of India (Subsidiary Banks) Act. 1939
(Central Act 38 of 1959);
(iv)  the Industrial Development Bank of India established
under the Industrial Development Bank of India Act,
1964 (Central Act 18 of 1964);
(v)  a corresponding new bank constituted under section 3
of the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970 (Central Act 5 of 1970); 
11
(vi)  a Regional Rural Bank established under the Regional
Rural Banks Act, 1976 (Central Act 21 of 1976);
(vii)  a corresponding new bank constituted under section 3
of   the   Banking   Companies   (Acquisition   and   Transfer
of Undertakings) Act, 1980 (Central Act 40 of 1980); 
(viii)  the Export Import Bank of India established under the
Export Import Bank of India Act, 1981, (Central Act 28
of 1981);
(ix)   the National Bank for Agriculture and Rural Development
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 definition 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
13
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 State authorities started claiming
and technically rightly so, that NBFCs are not excluded from the
definition of “money lender”. Though the NBFCs claimed that under
clause (f) of sub­section (7) of Section 2, “any institution established
by or under an Act of Parliament or the Legislature of a State”  are
excluded from the definition of the expression “money­lender” and
that NBFCs are established under a Parliamentary enactment, this
argument was found by the State to be based on a convoluted logic.
We also think that the State was right in thinking so, since NBFCs
are not established by  or  under  an Act of  Parliament  or  the
legislature of a State. Incorporation/registration of a business
entity   under   an   Act   of   Parliament   or   the   Legislature   of   a
State,   is   completely   different   from   being   established   by   or
under an Act. For instance, all companies are incorporated under
14
the  Companies Act. But  a corporation  like the  LIC  of India, is
established under the LIC of India Act. Therefore, the appellants
were not right in claiming that they fall under the exclusion clause
in clause (f) of sub­section (7) of Section 2. Keeping this aspect in
mind, let us now see the scheme of the Kerala Act. 
4.16    The scheme 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;
15
(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) 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”. 
16
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(9) as follows:
“loan” means an advance whether of money or in kind, at an
interest, with or without security, and includes advance, discount,
money paid for or on account of or on behalf of or at the request of
any   person,   or   the   forbearance   to   require   payment   of   money
owing on any account whatsoever, and every agreement under
any law for the time being in force (whatever its terms or form
may be) which is in substance or effect a loan of money, but does
not include – 
(a) a deposit of money or other property in a Government post
office, a bank, a company or a co­operative society; 
(b) a loan to, or by, or a deposit with any society or association
registered under the Societies Registration Act, 1860, or any other
enactment relating to a public, religious or charitable object; 
(c) a loan advanced by the State Government or by any local
authority authorized by the State Government; 
17
(d)  a  loan  advanced  to  a Government  employee  from  a fund,
established   for   the   welfare   or   assistance   of   Government
employees and which is sanctioned by the State Government; 
(e) a deposit of money with or a loan advanced by a cooperative
society;
(f)  an  advance  made  to   a  subscriber  to,  or  a  depositor  in,  a
provident fund from the amount standing 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   Export­Import   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 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;     
18
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 taken by a money
lender from a debtor as a bond, pledge or security for the
loan advanced, for a period of two years from the date
stipulated for financial repayment of the loan;
19
(vii) To regulate the powers of the Civil Court while deciding
the suits to which the Act applies, so that the Court is
satisfied that the provisions of the Act are complied with;
(viii) To curtail the power of the Court to award interest in a
sum greater than the principal of the loan due on the
date of the decree;
(ix) To empower the Court to allow payment of the decretal
amount by instalments;
(x) To empower the Court even to reopen past transactions;
(xi) To enable the borrower to deposit the amounts due in
respect of a loan into Court;
(xii) To empower the State Government to fix the maximum
rate of interest, for any local area or class of business;
(xiii) To prohibit money lenders from receiving from the debtor,
any amount by way of costs, charges or expenses;
(xiv) To make it obligatory  for the money lender to provide
advance information, whenever the loan is assigned to a
third party;
(xv) To prohibit money lenders from accepting any promissory
note, acknowledgment, bond or other writing which does
not state the actual amount of loan or which states the
amount   wrongly   or   which   contains   erasures   or   overwriting; and
(xvi) To   provide   for   penalties   for   contravention   of   the
provisions of the Act.
20
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 India1
,  “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 country to its advantage”.
1 (2020) 10 SCC 274
21
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   which   deposits   may   be   accepted   by   non­banking
companies   or   institutions,   for   the   purposes   of   ensuring   more
effective supervision and management of the monetary and credit
22
system by the Reserve Bank.  One of the important objects spelt out
in the Statement of Objects and Reasons reads as follows:­
“The Reserve Bank should also be empowered to give to any
financial   institution   or   institutions   directions   in   respect   of
matters, in which the Reserve Bank, as the central banking
institution of the country, may be interested from the point of
view of the control of credit policy”
Clause (5) of the Notes on Clauses accompanying the Bill read as
follows:­
“Clause 5.­A new Chapter is proposed to be introduced in the
Reserve Bank of India Act for enabling that bank to obtain
returns and information from (a) certain financial institutions,
namely, firms, companies or other bodies corporate which are
financing trade,  industry,  commerce  or agriculture, or  are
carrying on as a part of their business the acquisition of
shares, stocks, bonds, debentures or other securities, or are
engaged mainly in the financing of hire­purchase transactions
and   (b)   non­banking   institutions   accepting   deposits   from
members of the general public.   The objects in view are to
provide for­
(i) the supervision and control of the financial 
institutions mentioned above in the interests 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.”
23
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   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
24
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. 
6.6 After the introduction of Chapter III­B under Act 55 of 1963,
three amendments which are not relevant for our purpose, were
made to the provisions contained in Chapter III­B, under Act 51 of
1974, Act 21 of 1976 and Act 1 of 1984.
6.7 Post the insertion of Chapter III­B under Act 55 of 1963, the
working   of   non­banking   financial   intermediaries   came   to   be
reviewed by two study groups, one under the chairmanship of Dr.
Bhabhatosh Datta in 1971 and another under the chairmanship of
Shri James Raj in 1975. Certain recommendations were made by
these two study groups. Thereafter, the issue was considered by
three other committees namely,  (i)  the Committee to Review the
Working of the Monetary System (Chakravarty Committee­1985);
25
(ii)  the Working Group on the Money Market (Vaghul Committee1987);   and  (iii)  the   Committee   on   the   Financial   System
(Narasimham Committee­1991).
6.8 Those reports and various socio­economic and political factors
led to the liberalisation of the economy in 1991. The liberalisation of
the   economy   saw   the   growth   of   non­banking   financial   services
sector   in   India   accompanied   by   a   corresponding   growth   in   the
number of NBFCs offering a diversified range of financial services
and products. Therefore, a need was felt for rationalisation of the
regulatory framework for these companies keeping in view the trend
towards liberalisation of economy in general and the 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
terms2
 were:­
2 Report of the Working Group on Financial Companies C.R. 483 submitted in September, 
1992
26
(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, 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.
27
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
and Chapter­V of the NHB Act, it would be better to enact a separate
legislation. The Working Group went to the extent of recommending
that such a legislation should be put under Schedule IX of the
Constitution.
6.10 All the above led to the promulgation of the Reserve Bank of
India (Amendment) Ordinance, 1997 on 09.01.1997. Subsequently,
a   bill   was   introduced   which   became   the   Reserve   Bank   of   India
(Amendment) Act, 1997. This Act completely revamped Chapter III­B
28
by amending the definition provision in Section 45­I and inserting
certain new provisions such as Section 45­IA, 45­IB, 45­IC, 45­JA,
45­MB, 45­MC etc. After the amendment made to Chapter III­B by
Act 23 of 1997, this Chapter has become a complete Code in so far
as NBFCs are concerned. This can be seen from various provisions
of Chapter III­B, which is summarized in the form of a table for easy
reference as follows:­
PROVISION REQUIREMENT
Section 45­ IA (i)       Certificate of Registration mandatory for a
NBFC to commence or carry on the business of a
non­banking financial institution.
(ii)    Such NBFC should have a net­owned fund of
Rs.25 lakhs or such other amount not exceeding
Rs. 100 crores, as the RBI may prescribe.
(iii)         The   application   for   registration  shall  be
considered by RBI subject to certain parameters
prescribed in sub­section (4)
Section 45­IB (i)         NBFCs   have   to  invest   in  un­encumbered
approved securities, such amount which 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
29
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 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 relating to the business
of  such financial  institutions and to  give such
directions.
Section 45­M (i)   It shall be the duty of every NBFC to furnish
the statements, information or particulars called
for and to comply with any direction issued by
RBI.
Section 45­MA  RBI will have the power to issue directions to the
Auditors   of   NBFCs   relating   to   balance­sheet,
profit and loss account, disclosure of liabilities in
30
the books of accounts or any other matter.
Section 45­ MAA  RBI can take action against the Auditors who fail
to comply with any of the directions.
Section 45­MBA   RBI   may   frame   schemes   providing   for   the
amalgamation of NBFCs or the reconstruction of a
NBFC etc., if RBI is satisfied upon inspection of
the books of accounts that it is in public interest
or in the interest of financial stability to do so.
Section 45­MC RBI will be entitled to move an application for the
winding   up   of   an   NBFC,   under   certain
circumstances.
Section 45­N  Power of inspection.
Section 45­NAA  RBI may at any time direct a NBFC to annex to
its   financial   statements,   such   statements   and
information relating to the business or affairs of
any group company of NBFC.
Section 45­NC RBI may exempt a NBFC from the application of
any or all of the provisions of Chapter III­B
6.11   The above scheme of Chapter III­B of the RBI Act shows that
the power of intervention available for the RBI over NBFCs, is from
the cradle to the grave. In other words, no NBFC can carry on
business without being registered under the Act and a NBFC which
takes birth with the registration under the Act is liable to be wound
up at the instance of the RBI. The entire life of a NBFC from the
womb to the tomb is also regulated and monitored by RBI.  
31
6.12  At this juncture it may be ideal to extract some of the 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 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 and
credit conversion factors for off balance­sheet items and also
relating to deployment of funds by a non­banking financial
company or a class of non­banking financial companies or
32
non­banking financial companies generally, as the case may
be,   and   such   non­banking   financial   companies   shall   be
bound to follow the policy so determined and the direction so
issued.
(2)  Without prejudice to the generality of the powers
vested under sub­section (1), the Bank may give directions to
non­banking financial companies generally or to a class of
non   banking   financial   companies   or   to   any   non­banking
financial company in particular as to­­
(a) the purpose for which advances or other fund
based or non­fund based accommodation may
not be made; and
(b) the   maximum   amount   of   advances   or   other
financial   accommodation   or   investment   in
shares and other securities which, having regard
to the paid­up capital, reserves and deposits of
the non­banking financial company and other
relevant considerations, may be made by that
non­banking financial company to any person or
a company or to a group of companies.”
6.15   Section 45­K which empowers the RBI to collect information
reads as follows:­
“45K. Power   of   Bank   to   collect   information   from  nonbanking   institutions   as   to   deposits   and   to   give
directions. – 
(1) The Bank may at any time direct that every non­banking
institution shall furnish to the Bank, in such form, at such
intervals and within such time, such statements information
or particulars relating to or connected with deposits received
by the non­banking institution, as may be specified by the
Bank by general or special order.
(2)  Without prejudice to the generality of the power
vested in the Bank under sub­section (1), the statements,
information or particulars to be furnished under sub­section
(1), may relate to all or any of the following matters, namely,
the amount of the deposits, the purposes and periods for
33
which,   and   the   rates   of   interest   and   other   terms   and
conditions on which, they are received.
(3)  The Bank may, if it considers necessary in the
public   interest   so   to   do,   give   directions   to   non­banking
institutions   either   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 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 financial
institution  in particular, to furnish to the Bank
in such form, at such intervals and within such
time,   such   statements,   information   or
particulars   relating   to   the   business   of   such
financial institutions or institution, as may be
34
specified   by   the   Bank   by   general   or   special
order;
(b)  give to such institutions either generally or to
any   such   institution   in   particular,   directions
relating to the conduct of business by them or
by it as financial institutions or institution.
        (2)  Without prejudice to the generality of the power
vested in the Bank under clause (a) of sub­section (1), the
statements, information or particulars to be furnished by a
financial institution may relate to all or any of the following
matters,   namely,   the   paid­up   capital,   reserves   or   other
liabilities, the investments whether in Government securities
or otherwise, the persons to whom, and the purposes and
periods for which, finance is provided and the terms and
conditions, including the rates of interest, on which it is
provided.
         (3)  In issuing directions to any financial institution
under clause (b) of sub­section (1), the Bank shall have due
regard to the conditions in which, and the objects for which,
the   institution   has   been   established,   its   statutory
responsibilities, if any, and the effect the business of such
financial institution is likely to have on trends in the money
and capital markets.”
6.17    One of the most important provisions contained in Chapter
III­B is Section 45­Q. It reads as follows:­
“45Q.   Chapter   IIIB   to   override   other   Laws.—The
provisions of this Chapter shall have effect notwithstanding
anything inconsistent therewith contained in any other law
for the time being in force or any instrument having effect by
virtue of any such law.”
6.18   It is too long in the day to dispute the fact that the directions
issued by RBI are statutory in character and binding on all NBFCs.
35
It is so, in respect of the directions issued both under the RBI Act
and under the Banking Regulation Act.  
6.19     Once   it   is   found   that   Chapter   III­B   of   the   RBI   Act
provides   a   supervisory   role   for   the   RBI   to   oversee   the
functioning of NBFCs, from the time of their birth (by way of
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
36
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
and  provision  dealing  with
loans and rate of interest
Non-Banking Financial
(Deposit Accepting or Holding)
Companies Prudential Norms
(Reserve Bank) Directions
2007
Section 45JA General policy including loans
Clause 7: Need for Policy on Demand/
Call Loans
Board to frame policy with respect to
 Cut off date for repayment or call
up
 Rate of interest
 Reasons in writing for effecting
Moratorium and sanctioning
interest free loans
Revisions on the Guidelines of
Securitisation Transactions
incorporated in the Reserve
Bank of India (Securitisation
of Standard Assets)
Directions, 2021
Sections 21 and 35A
of the Banking
Regulation Act,
1949; Chapter IIIB
of the Reserve Bank
of India Act, 1934
Securitisation of Standard Assets
Clause 1.2: Minimum Holding Period
 Loans to be securitised only after
minimum holding period
Clause 1.3: Minimum Retention
Requirement (MRR)
 NBFC to have continued stake in
performance of securitised asset
to ensure proper due diligence of
37
sanctioned loans
Master Circular- Fair Practices
Code, 2014
General Fair Practices Guidelines
including in loan appraisal and
disbursement
Clause 2A(ii): Loan Appraisal and
Terms and Conditions:
 Sanction letter to contain loan
amount and annualised Rate of
Interest in vernacular language.
 NBFCs shall mention the penal
interest so charged on late
repayment in bold in loan
agreement.
Clause 2A(iii): Disbursement of loans
including changes in terms and
conditions
 NBFC to give notice of any
change in terms of a loan
including disbursement schedule,
rate of interest etc in vernacular.
 NBFCs should effect change in
rate of interest prospectively
only.
Clause 2A(viii): Regulation of
excessive interest charged by NBFCs
 Board of each NBFC to adopt an
interest rate model taking into
account cost of funds, margin,
risk premium etc.
Rate of interest and the approach for
gradations of risk and rationale for
charging different rates of interest for
different categories of borrowers shall be
disclosed to the borrower and
communicated explicitly in the
sanction letter.
Non-Banking Financial
Company - Non-Systemically
Important Non-Deposit taking
Company and Deposit taking
Company (Reserve Bank)
Directions, 2016
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
38
And
Non-Banking Financial
Company-Systemically
Important Non-Deposit taking
Company and Deposit taking
Company (Reserve Bank)
Directions, 2016
demand or call loan shall be
demanded with reasons in
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 Appraisal &
Terms/Conditions
 Communication regarding
amount of loan sanctioned along
with T&C including annualised
rate of interest & method of
application etc. in vernacular
language to the borrower.
Interest rate will have to be
clearly specified.
 Not furnishing a copy of loan
39
agreement is unfair practice.
Clause 36: Regulation of excessive
interest charged by applicable NBFC
 Board of NBFCs shall adopt
interest rate model accounting
for relevant factors: cost of
funds, margin & risk premium &
determine rate of interest to be
charged for loans & advances
etc.
 Explicit reasons to be given for
different rates of interest to
different categories of borrowers.
Clause 37: Complaints about
excessive interest charged by
Applicable NBFCs
Board of NBFCs shall lay out appropriate
internal principles & procedures in
determining interest rates & processing
and other charges
Non-Banking Financial
Company-Housing Finance
Company Directions 2021
Section 45L, Section
45MA of RBI Act
Regulation of excessive interest on
loans (Clause 80 and 81)
i) Rate of interest on loans to be made
available on company website as an
annualised rate.
ii) Board to adopt interest rate model
taking account of cost of funds, margin,
risk premium etc
iii) Company to place internal
mechanism to monitor fixing rate of
interest. The chapter pertaining to ‘Fair
Practices’ shall be applicable to interest
on loans.
RBI (Regulatory Framework
for Microfinance Loans)
Directions 2022
Section 21, Section
35A and Section 56
of the Banking
Regulation Act,
1949; Chapter IIIB
of the Reserve Bank
of India Act, 1934
Pricing of loans (Clause 6):
i) policy containing well-documented
interest rate model including factors
such as risk premium, margin, a ceiling
applicable to microfinance loans etc
ii) Rate of interest not to be usurious.
This shall be subject to scrutiny by
RBI
iii) 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
40
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 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
41
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   reason   that   some   of   those   exempted   companies   are
regulated by other regulatory bodies. For instance, Housing Finance
Institutions are regulated by the National Housing Bank; Merchant
Banking companies, Venture Capital Fund Companies and the like
are   regulated   by   SEBI;   Nidhi   companies   and   mutual   benefit
companies are regulated by the Ministry of Corporate affairs; Chit
Fund   companies   are   regulated   by   State   Governments;   and
Insurance Companies are regulated by IRDA. We are not concerned
in this case with the exempted companies, as the dispute on hand
is confined only to NBFCs registered under the RBI Act.
Is Chapter III­B a complete code?
7. To find out whether NBFCs registered under Chapter III­B of
the RBI Act and regulated by RBI could still be controlled by the
State   enactments,   because   of   the   definition   of   the   expression
42
“money lender”, we may first have to see whether Chapter III­B of
the RBI Act is a complete code or not. In  Integrated   Finance
Company Limited  vs.  Reserve Bank of India and Others3
, this
Court held in para 47 of the Report that “Chapter III­B of the RBI Act
is a complete code in itself”.
7.1 We   have   seen   that   no   NBFC   can   commence   or   carry   on
business without obtaining the certificate of registration under the
Act. We have also seen that their continuation in business would
depend upon compliance with certain prescriptions found in the
RBI Act as well as the circulars/directions issued by RBI. The RBI
has the power to supersede the Board of Directors of a NBFC and
has power even to wind up a NBFC. Thus the supervision and
regulation of NBFCs, by the RBI, is from the time of birth till the
time of death. If a statutory enactment 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
3  (2015) 13 SCC 772
43
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.P4
.
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.
4 AIR 1959 SC 648
44
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 45­
JA 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,
accounting   standards,   making   of   proper   provision   for   bad   and
doubtful debts, capital adequacy based on risk weights for assets
and credit conversion factors for off balance­sheet items and also
relating to deployment of funds”. 
7.6 But we do not think that the words “relating to” appearing in
Section 45­JA(1) can be taken to restrict the power of RBI to give
directions, only in relation to the matters mentioned after the words
“relating to”. The items mentioned after the words “relating to” can
only be taken to be illustrative and not exhaustive. This is for the
45
reason   that   the   power   conferred   by   Section   45­JA   is   both   for
determining the policy and for issuing directions.
7.7 Moreover, Sub­section (1) of Section 45­JA deals only with the
powers   in   general.   This   is   made   clear   by   the   words   “without
prejudice to the generality of the powers vested under sub­Section
(1)”, appearing in sub­Section (2) of Section 45­JA.
7.8 In any case, Section 45L(1)(b) confers power upon the RBI to
give directions to NBFCs “relating to the conduct of business by
them”. Therefore, to say that RBI has no power in respect of such
an important aspect, may not be correct. The fact that RBI generally
leaves it to the market forces to determine the rate of interest,
without any direct intervention, is not something that could be
taken advantage of by the State of Kerala to step in and prescribe
the maximum rate of interest chargeable by NBFCs on the loans
advanced by them.
7.9   In Deep Chand (supra), the Constitution Bench of this Court
reiterated three important tests of inconsistency or repugnancy,
namely,  (i)  whether   there   is   direct   conflict   between   the   two
46
provisions;  (ii)  whether   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
47
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.
5
,
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
Parliamentary   (or   existing   law)   and   the   State   law   are
referable   to   List   III   in   the   Seventh   Schedule   to   the
Constitution of India.
51.2. In order to determine whether the Parliamentary (or
existing law) is referable to the Concurrent List and whether
the State law is also referable to the Concurrent List, the
doctrine of pith and substance must be applied in order to
find out as to where in pith and substance the competing
statutes  as a whole  fall. It is only if both fall, as a whole,
5 (2018) 1 SCC 407
48
within the Concurrent List, that repugnancy can be applied
to determine as to whether one particular statute or part
thereof has to give way to the other.
51.3.   The   question   is   what   is   the   subject­matter   of   the
statutes in question and not as to which entry in List III the
competing statutes are traceable, as the entries in List III are
only fields of legislation; also, the language of Article 254
speaks of repugnancy not merely of a statute as a whole but
also “any provision” thereof.
51.4. Since there is a presumption in favour of the validity of
statutes generally, the onus of showing that a statute is
repugnant to another has to be on the party attacking its
validity. It must not be forgotten that that every effort should
be made to reconcile the competing statutes and construe
them both so as to avoid repugnancy­­care should be taken
to see whether the two do not really operate in different fields
qua different subject­matters.
51.5. Repugnancy must exist in fact and not depend upon a
mere possibility.
51.6. Repugnancy may be direct in the sense that there is
inconsistency in the actual terms of the competing statutes
and there is, 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
49
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
that of the Parliamentary legislation, so that they cannot
both stand together, then the State legislation will be said to
be repugnant to the Parliamentary legislation. However, if
the   State   legislation   or   part   thereof   deals   not   with   the
matters which formed the subject­matter of Parliamentary
legislation but with other and distinct matters though of a
cognate and allied nature, there is no repugnancy.
51.9. Repugnant legislation by the State is void only to the
extent of the repugnancy. In other words, only that portion of
the State’s statute which is found to be repugnant is to be
declared void.
51.10. The only exception to the above is when it is found
that   a   State   legislation   is   repugnant   to   Parliamentary
legislation or an existing law if the case falls within Article
254(2),   and   Presidential   assent   is   received   for   State
legislation,   in   which   case   State   legislation   prevails   over
Parliamentary legislation or an existing law within that State.
Here again, the State law must give way to any subsequent
Parliamentary law which adds to, amends, varies or repeals
the law made by the Legislature of the State, by virtue of the
operation of Article 254(2) proviso.”
50
8.2 In  Innoventive   Industries   Limited  (supra),   this   Court
considered   almost   all   earlier   decisions   starting   from  Zaverbhai
Amaidas  vs.  State  of  Bombay6
;  Tika  Ramji  vs.  State  of  U.P.
7
,
Deep Chand vs. State of U.P and so on and so forth. In sum and
substance, this Court held that repugnancy under Article 254
would arise only if both the Parliamentary law and the State
law are referable to List­III.
8.3 Once it is 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. Subject­matter 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”).”
6 AIR 1954 SC 752
7  AIR 1956 SC 676
51
8.4 In  UCO   Bank   and   Another  vs.  Dipak   Debbarma   and
Others8
, 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 Democratic
Rights, West Bengal and Others9
 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  Devi10, this Court invoked the doctrine of eclipse to
8 (2017)2 SCC 585
9 (2010) 3 SCC 571 
10 (1984) 2 SCC 91
52
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 he is reconverted to the original religion, the
eclipse disappears and the caste automatically revives. 
Is the argument of Conflict, a mirage?
9. It was argued on behalf of the State that without pointing out
any area of conflict between the two enactments the NBFCs cannot
invoke either Article 246 or Article 254.
9.1 But the above argument has no substance. Once it is admitted
that the RBI Act is traceable to an entry in List­I, Article 246(1)
comes into play. In any case, there are also areas of conflict. The
Kerala Act, for instance, empowers the debtor under Section 8(1) to
deposit the money due to money lender, into a Civil Court. Section
8(2) empowers the Civil Court to pass orders recording full or part
satisfaction of the loan.
9.2 But   the   jurisdiction   of   the   Civil   Court   stands   ousted   by
Section 34 of the Securitisation Act, 2002. By virtue of a notification
bearing   No.   S.O.856(E)   dated   24th  February,   2020,   issued   in
exercise of the powers conferred by Section 2(1)(m)(iv), the Central
53
Government have specified such NBFCs as defined in Section 45­I(f)
of the RBI Act having assets worth rupees one hundred crore and
above to be entitled for enforcement of security interest in secured
debts of Rupees fifty lakhs and above. This Notification was issued
in supersession of the earlier notifications. Therefore, it is clear that
certain NBFCs are entitled to enforce security interest without the
intervention of the Civil Courts and the remedy of the borrower lies
only before the Debt Recovery Tribunal. This is one major area of
conflict, which can be readily pointed out. 
9.3 We 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.  
54
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
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.
55
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   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. 
11.1  As a consequence, Transfer Petition (Crl.) No.359 of 2015,
shall   also   stand   allowed   and   the   First   Information   Report   filed
against the officer of the NBFC for violation of the provisions of the
Kerala Act shall stand quashed. 
11.2   An   application   for   impleadment   has   been   filed   by   one
Mr. Davidson Dharmaraj in Civil Appeal No.5238 of 2012, claiming
that he has lodged a criminal complaint against the appellant and
56
its   officers   in   the   Civil   Appeal,   namely   M/s.   Muthoot   Finance
Private Limited, for alleged offences under the Indian Penal Code,
but relying upon the provisions of the Tamil Nadu Pawn Brokers
Act   and   the   rules   framed   there   under   and   that   any   decision
rendered in the appeals arising out of the decisions of the Kerala
and   Gujarat   High   Courts   may   have   an   impact   on   his   criminal
complaint.   Though we have not examined the provisions of the
Tamil Nadu Pawn Brokers Act and the Tamil Nadu Money Lenders
Act, the principles of law laid down herein, would apply equally to
these   State   enactments   also.   Therefore,   the   application   for
impleadment namely I.A. No.2 of 2015 is dismissed.
11.3   There will be no order as to costs.  
………………………………….J.
(Hemant Gupta)
………………………………….J.
(V. Ramasubramanian)
New Delhi
May 10, 2022
57

Comments

  1. Clearly, It is an engaging blog for us that you have provided here about Finance Recovery Consulting Firm This is a great resource to enhance our knowledge about it. Thank you.

    ReplyDelete
  2. Extremely useful blog which you have shared here about Dubai Financial MarketThis is a great way to enhance knowledge for us, and also beneficial for us. Thank you for sharing a blog like this.

    ReplyDelete
  3. Extremely useful information which you have shared here about financial planning website templatesThis is a great way to enhance knowledge for us, and also beneficial for us. Thank you for sharing an article like this.

    ReplyDelete

Post a Comment

Popular posts from this blog

100 Questions on Indian Constitution for UPSC 2020 Pre Exam

संविधान की प्रमुख विशेषताओं का उल्लेख | Characteristics of the Constitution of India

भारतीय संविधान से संबंधित 100 महत्वपूर्ण प्रश्न उतर