TaxTMI 
TaxTMI 
2022 (5) TMI 702
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.... 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. 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 o....
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....t 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 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 ....
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....y 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 S....
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....dertakings) 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 foll....
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....ut 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; (vii) To make it compulsory for a pawn broker....
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....l authority authorized by the State Government; (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 Export Import Bank of India established under the ExportImport Bank of India Act, 1981; (l) a loan advanced by the Small Industries Development....
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....rnment 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. 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 ....
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.... 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....
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....e 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 terms Report of the Working Group on Financial Companies C.R. 483 submitted in September, 1992 were: (i) To review the role of various categories of nonbanking financial intermediaries; (ii) To review the provisions....
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....Cs 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 45IA (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 fund shall be appropriated by the NBFC except for a purp....
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....tements 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. 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 o....
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....banking 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 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 ....
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....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. 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 o....
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....anguage. 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 And Sections 45JA, 45L and 45M of the RBI Act Chapter IV: Prudential Regulations Clause 11: Need for policy on demand/call loans : Board of Directors shall frame policy for applicable NBFCs which stipulate: 1. Cut-off date for repayment of....
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....taining 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): policy containing well-documented interest rate model including factors such as risk premium, margin, a ceiling applicable to microfinance loans etc Rate of interest not to be usurious. This shall be subject to scrutiny by RBI change in rate of interest to be informed to borrower well in advance Ombudsman Scheme for NBFC- 2018 Section 45L Rule 8 empowers any person to file a complaint with the Ombudsman for the grounds mentioned in the rule. The procedure for filing a complaint is given in Rule 9. Rule 11 provides for settlement of the complaint by agreement between the parties. Rule 12 provides for the alternative where if the complaint is not settled by agreement, the Ombudsman can pass an award. Rule 14(4) also mandates that the NBFC must implement the award and send a report of the same to RBI wi....
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.... 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 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 Benc....
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....rect 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 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 ....
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....de to reconcile the competing statutes and construe them both so as to avoid repugnancy care should be taken to see whether the two do not really operate in different fields qua different subject matters. 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 t....
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....oventive Industries Limited (supra), this Court considered almost all earlier decisions starting from Zaverbhai Amaidas vs. State of Bombay AIR 1954 SC 752; Tika Ramji vs. State of U.P. AIR 1956 SC 676, 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. Subject matter of laws made by Parliament and by the Legislatures of States: (1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the "Union List")." 8.4 In UCO Bank and Another vs. Dipak Debbarma and Others (2017)2 SCC 585, a sale....
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....ement 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. 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 ....