TaxTMI 
TaxTMI 
2005 (11) TMI 259
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....t) Ordinance, 1997, which was replaced by Reserve Bank of India (Amendment) Act, 1997, and section 45-IA was introduced as per which it became obligatory, on the part of such NBFCs to obtain necessary licence from the RBI in order to carry out/continue their non-banking finance activities. Number of other provisions were inserted through this amendment like creation of reserve fund and requirement of transfer of certain percentage of profit every year to the fund (section 45-IC), the prescription of liquidity requirement (section 45-IB), etc. vide section 45-IA, RBI has been vested with powers to issue guidelines encompassing aspects such as income recognition, ac- counting standards, provision for bad and doubtful debts, capital adequacy, etc. The provisions are intended to ensure sound and healthy operation and the quality of assets of these companies. The bank has been empowered (i) to issue directions to the auditors of NBFCs and order special audit of NBFCs (section 45MA); (ii) to prohibit acceptance of deposits and alienation of assets by NBFCs (section 45MB); and (iii) to make an application for winding up NBFCs (section 45MC). Powers have also been vested in the Company Law....
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....ith the petition and prayer is made that necessary direction be given to convene separate meetings of the equity shareholders and unsecured creditors of the three companies and for the purpose of these meetings, chairman and alternate chairman be appointed. 4. It is stated in the petition that the scheme is necessary for the company to restart their business and make payment to their secured and unsecured creditors and to revive their prospects. The details of total creditors of each company are given in para-19 of the petition, which are as under: Name of company Total creditors (Rs. in lakh) Public deposits (Rs. in lakh) Inter corporate deposits (Rs. in lakh) Other creditors (Rs. in lakh) JVGFL 21,350 5,850 13,400 2,100 No. of creditors 80,104 80,000 7 97 JVGLL 4,800 4,000 Nil 800 No. of creditors 25,085 25,000 Nil 85 JVGSL 150.25 150 Nil 0.25 No. of creditors 15,003 15,000 Nil 3 Total (Rs. in lakh) 2,63,00.25 10,000 13,400 2,900.25 Total (No. of creditors) 1,20,192 1,20,000 7 185 5. For the purpose of the scheme, the depos....
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.... Total amt. Period of realisation (in years) 1 2 3 4 5 6 1. Receivables from old 1,700 2,100 1,300 1,800 1,000 3,400 assets 2. Promoter's contribution 600 3. Income from Group Housing Project 309.67 993.17 1,640.37 915.57 2,267.04 13,117.27 Total funds available 2,609.67 3,093.17 2,940.37 2,712.57 3,267.04 16,517.27" 7. Mr. Mukul Rohtagi, learned senior counsel appearing for the JVG companies/petitioners, submitted that in this petition filed under section 391(1) of the Act, the only prayer made is for convening of the meetings of different categories of creditors as well as shareholders in order to ascertain their views on the proposed scheme. His argument was that in the first instance, a scheme is to be put to the creditors and shareholders, as requirement of law is that creditors and shareholders of the value of 75 per cent have to approve such a scheme.....
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....me applicable to such a petition, section 391 of the Act was also attracted which enabled the propounder to come out with such a scheme. 9. In this backdrop, two questions arise for determination, namely, - (a)Non-banking finance company which is denied licence by the RBI under section 45-IA of the RBI Act or a company whose licence is cancelled under the aforesaid provisions, has to be necessarily wound up under section 45MC of the RBI Act ? Or, to put it otherwise, whether a scheme for revival/arrangement in respect of such a company can be entertained allowing it to divert its business activity and start some business other than non-banking finance business for which it was primarily incorporated ? (b)Whether the scheme proposed by the company is feasible enough to permit it to put it to the shareholders and the creditors ? Question (a) 10. In order to answer the question posed at (a) above, one will have to scan through the legislative history and the raison d'etre which persuaded, nay, compelled the Legislature to make amendment in the RBI Act providing for the provisions of obtaining licence by NBFCs from the RBI and permitting the RBI to file winding up petiti....
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....for the depositors, but also created lot of problems in the assessment/ implementation of monetary and credit systems of the country by the concerned authorities. To meet this situation and to prevent such unwanted growth of deposits outside the banking system, it was felt necessary to confer on the Bank (RBI), being custodian to the monetary and credit system of the country, with necessary statutory powers enabling it to supervise, control and regulate deposits acceptance by such institutions. For this purpose, the RBI Act, was amended in 1963. A new Chapter III-B was inserted in the RBI Act by the Banking Laws (Miscellaneous Provisions) Act, 1963 under which powers were conferred on the Bank to issue suitable direction for regulating and monitoring the deposit acceptance activities of those companies and corporate bodies. 12. With this legislative backing, the RBI issued Non-Banking Financial Companies Directions making them effective from 1-1-1967. Subsequently, Non-Banking Non-Finance Companies Directions, 1967 and Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977 were also issued to curb the practices of certain companies whereby these companies started co....
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....t in finding new depositors, because they get a high rate of commission out of the first instalment, but they do not have same enthusiasm in respect of deposit of subsequent instalments. In these circumstances, if the Reserve Bank has issued the directions of 1987 to safeguard the larger interest of the public and small depositors, it cannot be said that the directions are so unreasonable as to be declared constitutionally invalid." (p. 381) 13. Sequel to this judgment was the corrective action taken by the Parliament in making amendments to the RBI Act by the Amendment Act 23 of 1997. Existing provisions of Chapter III-B were amended and some new provisions were introduced including sections 45-IA to 45-IC requiring registration of NBFC and obligating NBFC to create a reserve fund, section 45JA empowering RBI to determine policy and issue directions. Apart from these and other newly added provisions, two significant provisions introduced are section 45MB and section 45MC. Under section 45MB, RBI has power to prohibit any NBFC, which violates the provisions of any section or fails to comply with any direction or order given by the RBI, from accepting any deposits, and can also r....
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....ositors. 2. The Joint Parliamentary Committee which enquired into the irregularities in securities and banking transactions had recommended that the Government should examine whether the legislative framework for regulating NBFCs is sufficient wide. The Working Group on Financial Companies appointed by Reserve Bank of India (RBI) under the Chairmanship of Dr. A.C. Shah had suggested regulatory and control measures to ensure the healthy growth and operations of these companies. 3. Despite the provisions before the promulgation of the Reserve Bank of India (Amendment) Ordinance, 1997 contained in Chapter III-C of the Reserve Bank of India Act, the unincorporated bodies circumvented the statutory restrictions by floating different partnership firms as and when a firm reached the level of 250 depositors. Further, it is reported that several unincorporated bodies were advertising aggressively through various media soliciting deposits from public by offering high rates of interest and other incentives. 4. The Reserve Bank of India (Amendment) Ordinance, 1997, further to amend the Reserve Bank of India Act, provides several safeguards for the NBFCs so as to ensure their viability....
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....50/04, decided on 8-9-2005] [since reported as Reserve Bank of India v. Appellate Authority for NBFC Registration [2006] 2 Comp. LJ 235 (Delhi) in the following words : '5. It is immediately relevant to mention the proviso to sub-section (3) of section 45-IA of the Act which places an embargo of six years in the aggregate in respect of the period in which an NBFC/applicant-company can be allowed to continue business in order to fulfil the requirement of the "net-owned fund". This is indeed a salutary provision since it does not allow the efforts to comply with the requirements laid down in section 45-IA to be open-ended. If this factor is lost sight of, the mischief which is intended to be eradicated could be allowed to fester unendingly. Accordingly, at the time of filing of the application if some deficiencies are found to be in existence, the period in which these must be overcome and eradicated within a reasonably short period. It is in this regard that the embargo of six years in the aggregate has been laid down.' [para 5 at p. 240 of Comp. LJ] 16. In this backdrop, one has to examine the special power given to the RBI under section 45MC of the RBI Act to file the petiti....
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....ived at only after the bank conducts the inquiry/investigation into the affairs of such NBFC. When irregularities are found out, even show-cause notice is given to such a company and it is heard in the matter, before passing an order under section 45MC or passing an order prohibiting such NBFC from receiving deposits from the public. There is a remedy of appeal provided to the affected company. 18. The intention of the Legislature in making these provisions is, thus, obvious. Those companies which are formed and incorporated as non-banking financial companies and carry out their business in violation of the regulatory mechanism provided under the RBI Act have no right to exist and should be wound up. Thus, Legislature in no uncertain terms mandated that such companies have no right to exist; otherwise, there was no necessity for providing the provision of winding up. The situation could be remedied by prohibiting such a company from doing the business as non-banking financial institution thereby permitting them to do some other business. Parliament, in its wisdom, considered that it would not be a sufficient safeguard and, therefore, provided for extreme measure of winding up of....
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.... intend this course for such a company. If the promoters/shareholders want that some other business activity should be done, they can always incorporate another company with some other name and do such a business. 21. When the matter is looked into in the aforesaid perspective, I am not convinced with the interpretation given by him to sub-section (4) of section 45MC of the RBI Act and to suggest that since all the provisions of the Act apply to such winding up petitions, provisions of sections 391 to 394 shall automatically apply, more so when any of the grounds stated in clauses (b ) to (d) of sub-section (1) of section 45MC is satisfied. Position may be different if the petition is filed only on the ground of inability of the NBFC to pay the debt. In that case, if the court is of the opinion that such a company is in a position, the court may in that case, consider such a scheme which course of action would be in the interest of the depositors as they would be in a position to get back their money under the scheme if such scheme is found to be viable. This is the only exception which can be made to the general proposition laid down above with the rider that even in such cases....
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....hich would have bearing on the proper implementation of the scheme. For example, no particulars of any bank accounts or bank balance are given, cash shown now is nil whereas in a statement made in the year 2002, it was stated by the petitioner that cash of over Rs. 1 crore was available ; there are no proper complete details of the creditors/depositors; there are no details as to who are debtors of the companies and what are the aggressive plans for recovery. At the time of presentation of the winding up petition, the RBI had submitted that these companies owe more than Rs. 1 crore to the public at large and have committed gross violations in the matter of repayment of their deposits. (e)All the three companies are defunct for the past several years. Even the proposed transferor-company is under orders of winding up. (f)The scheme proposes postponement of repayment for another five years and mentions that depositors under Rs. 5,000 category would get their refund in four consecutive years. 23. This would show that there is no substance or weight in the proposed scheme. Earlier also scheme of rehabilitation was proposed by filing applications in all the petitions; but the c....