AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2012 (9) TMI 1108
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....y-Lenders Act, 2011 ["GML Act" for short] is unconstitutional in so far as it applies to the petitioner- Company as NBFC registered under the RBI Act in the absence of legislative competence. The writ-petitioner has further prayed for restraining the respondent no.1 from issuing any notification under Section 1[3] of the GML Act, notifying the Act. The case made out by the writ-petitioner may be summarized thus: 4.1 The petitioner is a Company incorporated under the provisions of the Companies Act and registered with the Reserve Bank of India under Section 45-IA of the RBI Act. The said Company was originally classified as a Hire Purchase Company which came to be later reclassified as an Asset Finance Company Deposit Taking. 4.2 The respondent no.2 had, in the past, issued a notice under Section 13A of the Bombay Money Lenders Act, 1946 ["BML Act" for short], calling upon the petitioner to produce certain documents with a view to ascertain whether the petitioner was a money-lender under the said Act. Pursuant to such notice, the petitioner, in its reply, had asserted that since it was a company incorporated under the provisions of the Companies Act and held a valid registra....
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....l, penal action etc. against those Companies, i.e. the petitioner herein and the said law, namely, the BML Act would transgress on the field occupied by the law of Parliament. In view of Section 45Q of the RBI Act, according to the said judgment of the Division Bench, the provisions of Chapter IIIB of the RBI Act shall have an overriding effect over the BML Act. 4.5 In the background of the aforesaid fact, the writ-petitioner was shocked to receive a copy of the Gujarat Government Gazette, published on April 8, 2011, introducing the GML Act. Section 58[1] of the GML Act provides that BML Act was thereby repealed. According to Section 2[5] of the GML Act, a Company means a Company defined under the Companies Act, 1956 and according to Section 2[10] thereof, "Money-Lender" means [i] an individual; [ii] a Hindu Undivided Family; [iii] a company; [iv] a pawn broker; and [v] an un- incorporated body of individuals, including a firm who or which [a] carries on the business of money lending in the State; [b] has his or its principal place of such business in the State. The petitioner further found that according to Section 5[2] of the GML Act, NBFCs registered under the provisions of th....
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....ade and commerce of the petitioner-Company, as alleged. 5.2 It was contended that so far as the NBFCs are concerned, the RBI is entrusted with the responsibility of regulating and supervising the same by virtue of the power vested in it under Chapter IIIB of the RBI Act which came to be inserted by Act of 55 of 1963. THE objects and reasons of insertion of Chapter IIIB are as follows: "The existing enactments relating to banks do not provide for any control over companies or institutions, which, although they are not treated as banks, accept deposits from the general public or carry on other business which is allied to banking. For ensuring more effective supervision and management of the monetary and credit system by the Reserve Bank, it is desirable that the Reserve Bank should be enabled to regulate the conditions on which deposits may be accepted by these non-banking companies or institutions. 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 control over the credit policy. THE ....
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....the interest of the depositors. As against this, Entry 30 of the State List in the 7th Schedule of the Constitution, deals with "moneylending" and "money-lenders". It was with reference to the said State Entry that the respondent no. 1 State had framed a legislation, named, BML Act, which did neither have a specific definition of the NBFCs nor did it deal with the debtors/borrowers. In view of this, a Bill relating to a new legislation called the GML Act came to be introduced in the month of March, 2011 in the State Legislature. THE Bill has been passed by the State Legislature and came to be ultimately assented to by the Hon'ble the Governor on April 6, 2011. Section 1[3] of the GML Act provides that the same shall come into force on such date as the State Government may, by notification in the Official Gazette appoint. Accordingly, the notification dated April 30, 2011 came to be issued appointing May 2, 2011 as the date on which the GML Act would come into force. 5.6 The new Act, i.e. the GML Act, came to be enacted keeping in mind the provisions of Chapter IIIB of the RBI Act so as to avoid any repugnancy or inconsistency. THE GML Act has been enacted mainly with a view t....
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....L Act also deals with the manner of calculating interest. However, these differences do not have a bearing on the law laid down by this Court in the earlier litigation. 6.3 With respect to the applicability of the provisions of the Kerala Money- Lenders Act, 1958, to the NBFCs registered with the RBI, similar cases are pending before the Supreme Court wherein the RBI has filed its counter affidavit. The RBI reiterates its stand taken in the matter of Kerala Money- Lenders Act, 1958 pending before the Supreme Court and its applicability to the NBFCs in the present case. 6.4 The legislative competence in respect of the money-lending is with the State Legislature under Entry 30 of List II of 7 th Schedule of the Constitution of India. However, the legislative competence to regulate the financial corporations such as the NBFCs is with the Parliament under Entry 43 of List I of 7th Schedule. The regulation of financial corporations such as NBFCs would include regulating the rate of interest charged by them. 6.5 The GML Act deals with the money-lenders and provides for appointment of authorities for implementation of the said Act under Section 3, the registration of the money-lende....
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....or non-compliance of the directions issued by it. 6.7 The provisions of the RBI Act very clearly demonstrate that the power to determine the policy with respect to the rates of interest and to prescribe the rates of interest with respect to the loans and advances granted by the financial institutions whenever it is considered necessary by the RBI is vested in it. As the RBI has been constituted as the Central Banking Authority for the country with a view to securing monetary stability in the country, the rate of interest prescribed by the RBI with respect to the entities coming within the regulatory jurisdiction of the Reserve Bank should prevail over the rate of interest specified in any State enactment or fixed by the State Government from time to time. In consequence, the GML Act must be read down to exclude the regulation of the NBFCs by treating them as deemed to have been registered under the GML Act. 6.8 So far, the RBI has not prescribed the rate of interest or the ceiling on the rate of interest that may be charged by the NBFCs to their borrowers. However, the RBI has issued directions/guidelines in respect to the Fair Practices Code and the methodologies for determina....
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.... Kavina thirdly contended that even under the provisions of the GML Act, the petitioner being a Corporation established under the RBI Act, would come within the purview of Section 2[9][o][1] of the GML Act and, therefore, the said Act will have no application to the activities of the petitioner. Lastly, MR. Kavina contends that the GML Act having encroached in the field of legislation of the Parliament so far as the activities of his client, to that extent the GML Act is invalid. In support of these contentions, MR. Kavina relies upon the following decisions: [i] Peerless General Finance and Investment Co. Limited and Anr. v. Reserve Bank of India, reported in [1992] 2 SCC 343. [ii] Bhanu Kumar Jain v. Archana Kumar and Another, reported in [2005] 1 SCC 787. [iii] Mathura Prasad Bajoo Jaiswal and Ors. v. Dossibai N.B. Jeejeebhoy, reported in [1970] SCC 613. [iv] Hope Plantations Ltd. v. Taluk Land Board, Peermade and Anr., reported in [1999] 5 SCC 590. [v] Sushil Kumar Mehta v. Gobind Ram Bohra [Dead] through His LRs. [vi] State of Himachal Pradesh v. Narain Singh, reported in [2009] 13 SCC 165. [vii] M.P AIT Permit Owners Assn. And Anr. v. State of M.P . ., reported in [2004] SCC ....
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....w. 8.4 Mr. Trivedi further contended that the present petitioner cannot be said to be a corporation established either by or under an Act of the Parliament or the Legislature of a State. According to Mr. Trivedi, the LIC established under Section 3 of the Life Insurance Corporation Act, 1956, or the FCI established by Section 3 of the Food Corporations Act, 1964, or the State Bank of India established under Section 3 of the State Bank of India Act, 1955, are the instances where Corporation by name is established by an Act of the Parliament. Similarly, according to Mr. Trivedi, the expression "Corporation established under the Act" means the Corporation which is brought into existence under the Act wherein several such Corporations are contemplated and such Corporation is not a body specific. For instance, according to Mr. Trivedi, the State Financial Corporation established under Section 3 of the State Financial Corporations Act, 1951 and/or the State Electricity Board established under the Act are also the statutory Corporations and they are "State" within the meaning of Article 12 of the Constitution and such Corporations established under the Act should share common object a....
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...., to those extents, where two Acts are conflicting, the RBI Act would prevail. ( 5. ) Therefore , the first question that arises for determination in this application is whether the earlier judgment dated April 26, 2011, passed by a Division Bench of this Court in Letters Patent Appeal No. 1095 of 2010 and other cognate matters is res judicata in these proceedings. ( 6. ) After hearing the learned counsel for the parties and after taking into consideration the various decisions cited by the learned counsel for the parties, we are of the opinion that the principle of res judicata does not apply in these proceedings. We are of the view that the earlier decision delivered by the Division Bench indicated above, cannot be res judicata in the present proceedings for the following reasons: 11.1 First, in the previous proceedings, the Division Bench had no occasion to consider the scope of GML Act inasmuch as at that point of time, the GML Act did not see the light of the day. 11.2 Secondly, in the earlier proceedings, the challenge was made against initiation of action under the provisions of the BML Act against the present petitioner mainly on the ground that it was not covered und....
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....round, the present Act should be declared ultra vires. Once we hold that the previous decision is not res judicata in the present proceeding, it is not possible to accept the contention of Mr. Kavina that the purpose of enactment of the GML Act is to overcome the effect of the said decision. There is no dispute that the Gujarat State Legislature has the competence to enact laws relating to Entry No. 30 of List II of the 7 th Schedule of the Constitution which deals with money-lending and money-lenders. In such circumstances, if the State Legislature decides to enact a new law on the subject by repealing the old BML Act, the new State legislation cannot be branded as ultra vires the Constitution of India. A State Legislature within its legislative field is competent to enact any law and so long as the said Act is not violative of any of the provisions of the Constitution of India [excluding Chapter IV thereof], the same cannot be declared as ultra vires. We, therefore, find no substance even in the second contention of Mr. Kavina. ( 7. ) The next and most important question that arises for determination is whether the GML Act encroaches upon the field of legislation of the Parliame....
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....s. In our opinion, so long as both the State law and the Central Law can coexist without interfering with the other's dominion, there is no problem of encroachment. A State Legislature is entitled to enact law relating to money-lending and money-lenders as provided in Entry No. 30 of the List II. Similarly, the Reserve Bank of India is also authorized to exercise its power by virtue of the provisions contained in the RBI Act. In the case before us, the petitioner has been registered under Chapter IIIB of the RBI Act and in the matter of exercising its right as an NBFC, which is the subject-matter of the RBI Act, it is bound to follow guidance of Reserve Bank of India and no other State law can interfere with its business activities if it conforms to the provisions of the RBI Act. However, if in addition to its activity which is governed under Chapter IIIB, the petitioner wants to enter into the field of the State laws, it is bound to comply with the relevant provisions of the State laws. ( 9. ) In the case before us, it appears that under Section 45 I of the RBI Act, the word "deposit" has been defined. Similarly, the petitioner also comes within the purview of an NBFC. Ther....
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.... to run its principal business of lending in any manner in accordance with the RBI Act and thus, no encroachment in that field is permissible at the instance of the GML Act. ( 11. ) We now propose to deal with the decisions cited by Mr. Kamal Trivedi: 23.1 In the case of Prafulla Kumar Mukherjee and others] [supra], the Bengal Money-Lenders Act, 1940 relatable Entry 27 of List II of the Government of India Act, 1935 was held to be valid on the ground that in pith and substance, it was the law relating to money- lending and not relating to "promissory note" falling under Entry 28 of List I even though there may be some incidental encroachment, but on that ground alone, the Bengal Money-Lenders Act could not be held to be ultra vires. In the case before us, by GML Act, there has been a blatant encroachment upon the field of legislation of the RBI Act by directing that an NBFC registered under the RBI Act would be automatically registered under the GML Act and will be subject to such provision in addition to those indicated in RBI Act . Thus, the said decision cannot have any application to the facts of the present case. 23.2 In case of A.S. Krishna and others [supra], the Suprem....
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....atehchand Himmatlal and Co. [supra], Maharashtra Debt Relief Act, 1976 dealing, inter alia, with money- lending involving gold and incidentally, gold transaction under Entry 30 of List II was held to be valid even though it incidentally trenched upon the Gold Control Act, 1968 relatable to Entry No. 52 of List I. 23.4.1 In the case before us, we have already pointed out that it is not a case of incidental trenching upon the field of RBI Act but one of direct interference over non banking activity of an institution registered under the RBI Act and in our opinion, the State could not have imposed any restriction as it has restrained itself from its operation over the activities of the other banks doing similar business under the direct supervision of the RBI Act in the same way the petitioner is performing its business including lending in any manner. 23.5 In the case of Hoechst Pharmaceuticals Ltd. [supra], it was held by the Supreme Court that Bihar Finance Act, 1981 mentioned in Entry No. 54 of List II and provisions of Control Order issued under Section 3 of the Essential Commodities Act relatable to Entry No. 33 of List III operate on two separate and distinct fields and bot....