NEDUMPILLI FINANCE COMPANY LIMITED versus STATE OF KERALA & ORS. on 10 May 2022

1. In the background of the facts, the legal issue arising forconsideration has to be resolved by looking at the scheme of thetwo State enactments, the scheme of RBI Act and the relevantEntries in the appropriate List of the Seventh Schedule, to whichthese enactments can be traced. [Para 4][1016-D-E]D

2. The only object of the Kerala Money Lenders Act wasto afford protection to borrowers from unscrupulous moneylenders who advanced usurious loans. Though it was proclaimedin the statement of objects, in general terms, that it was intendedto regulate the business of money lending, the Act was primarilyEintended only to cover one aspect of the business of financing.[Para 4.7][1017-E]

3. Section 2(7) of the Kerala Act, defines a “money lender”.In the definition, 7 different types of business entities are excludedfrom the definition of the expression “money lending”. A financialFcorporation which is not a bank and which is otherwise known asNBFC, is not listed as one of the entities excluded from thedefinition of the expression “money lender”. [Paras 4.8,4.9][1017-F; 1018-G-H]

4. But the definition of “money lender” in the Kerala Actexcludes only a “bank” to which the Banking Regulation ActGapplies. It does not exclude a non banking institution from thedefinition. Therefore, the Kerala State authorities started claimingand technically rightly so, that NBFCs are not excluded from thedefinition of “money lender”. Though the NBFCs claimed thatunder clause (f) of sub-section (7) of Section 2, “any institutionH

established by or under an Act of Parliament or the Legislatureof a State” are excluded from the definition of the expression“money-lender” and that NBFCs are established under aParliamentary enactment, this argument was found by the Stateto be based on a convoluted logic. The Court also thinks that theState was right in thinking so, since NBFCs are not establishedby or under an Act of Parliament or the legislature of a State.Incorporation/registration of a business entity under an Act ofParliament or the Legislature of a State, is completely differentfrom being established by or under an Act. For instance, allcompanies are incorporated under the Companies Act. But acorporation like the LIC of India, is established under the LICof India Act. Therefore, the appellants were not right in claimingthat they fall under the exclusion clause in clause (f) of sub-section(7) of Section 2. [Para 4.15][1020-H; 1021-A-D]

5. By virtue of the definitions in the Gujarat Act, theauthorities under the Gujarat Act sought to apply the provisionsof the Act to NBFCs also. [Para 5.4][1024-B]

Role of RBI, the scheme of Chapter III-B of the RBI Actand the Regulatory measures taken by RBI from time to time

6. In contrast to the state enactments regulating thebusiness of money lending, whose one-eyed focus is only theprotection of borrowers, the RBI Act takes a holistic approachto the business of banking, money lending and operation of thecurrency and credit system of the country. But when RBI Actwas enacted, the business of banking and finance was not ascomplicated as it later turned out to be. [Para 6.2][1026-B]

7. In the early 1960s, the Government found it necessaryto regulate institutions which were not banks, but which werecarrying on other businesses allied to banking. Therefore, a billto amend the RBI Act, The Banking Companies Act, 1949, andthe State Bank of India (Subsidiary Banks) Act, 1959 wasintroduced in November, 1963. [Para 6.3][1026-C]

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A8. Accordingly, the Banking Laws (MiscellaneousProvisions Act), 1963, was enacted, amending the provisions ofthe aforesaid three Parliamentary enactments. It was by thisamendment which came into force on 01.02.1964 that ChapterIII-B was inserted in RBI Act. The Chapter heading for thisChapter read as, “Provisions Relating to Non-BankingBInstitutions Receiving Deposits and Financial Institutions”.However, this Chapter III-B was made inapplicable under Section45H to a banking company as defined in Section 5 of the BankingCompanies Act, 1949. Section 45-I defined a ‘financial institution’under clause (c) to mean any non-banking institution which carriesCon the business of financing or the business of acquisition ofshares, stocks etc., or the business of hire-purchase transactions.[Para 6.4][1027-C-E]

9. All the above led to the promulgation of the ReserveBank of India (Amendment) Ordinance, 1997 on 09.01.1997.DSubsequently, a bill was introduced which became the ReserveBank of India (Amendment) Act, 1997. This Act completelyrevamped Chapter III-B by amending the definition provision inSection 45-I and inserting certain new provisions such as Section45-IA, 45-IB, 45-IC, 45-JA, 45-MB, 45-MC etc. After theamendment made to Chapter III-B by Act 23 of 1997, this ChapterEhas become a complete Code in so far as NBFCs are concerned.This can be seen from various provisions of Chapter III-B. [Para6.10][1029-F-H]

10. The scheme of Chapter III-B of the RBI Act showsthat the power of intervention available for the RBI over NBFCs,Fis from the cradle to the grave. In other words, no NBFC cancarry on business without being registered under the Act and aNBFC which takes birth with the registration under the Act isliable to be wound up at the instance of the RBI. The entire lifeof a NBFC from the womb to the tomb is also regulated andGmonitored by RBI. [Para 6.11][1031-F-G]

11. Once it is found that Chapter III-B of the RBI Actprovides a supervisory role for the RBI to oversee the functioningof NBFCs, from the time of their birth (by way of registration) tillthe time of their commercial death (by way of winding up), all H

activities of NBFCs automatically come under the scanner of RBI.As a consequence, the single aspect of taking care of the interestof the borrowers which is sought to be achieved by the Stateenactments gets subsumed in the provisions of Chapter III-B.[Para 6.19][1035-E-F]

12. Apart from the provisions of Chapter III-B, theregulations, directions and Master Circulars issued by RBI fromtime to time, also bind the NBFCs. Since the Regulations, MasterCirculars and Directions issued by RBI are binding on NBFCs,it is clear from the above that all aspects of NBFCs are regulatedby RBI and nothing is left untouched. However, there are certaincategories of NBFCs, which may be exempt, by RBI itself, inexercise of the power conferred by section 45-NC of the Act,from the application of the provisions of RBI Act. [Para 6.20][1035-G; 1038-E-F]

Is Chapter III-B a complete code?

13. To find out whether NBFCs registered under ChapterIII-B of the RBI Act and regulated by RBI could still be controlledby the State enactments, because of the definition of theexpression “money lender”, the Court first have to see whetherChapter III-B of the RBI Act is a complete code or not. [Para7][1039-C-D]

14. No NBFC can commence or carry on business withoutobtaining the certificate of registration under the Act. Theircontinuation in business would depend upon compliance withcertain prescriptions found in the RBI Act as well as the circulars/directions issued by RBI. The RBI has the power to supersedethe Board of Directors of a NBFC and has power even to wind upa NBFC. Thus the supervision and regulation of NBFCs, by theRBI, is from the time of birth till the time of death. If a statutoryenactment which provides for such a type of control andsupervision is not a complete code in itself, the court does notknow what else could be a complete code. In Integrated FinanceCompany Limited vs. Reserve Bank of India and Others, this Courtheld in para 47 of the Report that “Chapter III-B of the RBI Actis a complete code in itself”. [Paras 7 and 7.1][1039-D-F]

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A15. It may be true that many times RBI may not becontrolling the rate of interest charged by NBFCs on the loansadvanced by them. It does not mean that they have no power tostep in. The power to determine policy and issue directions,available under Section 45-JA can always be invoked by RBI.[Para 7.4][1040-C-D]B

16. Section 45L(1)(b) confers power upon the RBI to givedirections to NBFCs “relating to the conduct of business bythem”. Therefore, to say that RBI has no power in respect ofsuch an important aspect, may not be correct. The fact that RBIgenerally leaves it to the market forces to determine the rate ofCinterest, without any direct intervention, is not something thatcould be taken advantage of by the State of Kerala to step in andprescribe the maximum rate of interest chargeable by NBFCson the loans advanced by them. [Para 7.8][1041-A-B]

17. In Deep Chand v. State of U.P., the Constitution BenchDof this Court reiterated three important tests of inconsistency orrepugnancy, namely, (i) whether there is direct conflict betweenthe two provisions; (ii) whether Parliament intended to lay downan exhaustive Code in respect of the subject matter replacingthe Act of the State legislature; and (iii) whether the law made byEParliament and the law made by State legislature occupy the samefield. Therefore, more than supporting the case of the State, DeepChand actually supports the case of the NBFCs, as we have foundthat Chapter III-B is a complete code in itself. [Para 7.9][1041-C-D]

FDoctrine of Eclipse, conflict and repugnancy

18. As indicated by the Constitution Bench in Deep Chand, a law may be valid when made, but a shadow may be cast on it bysupervening constitutional inconsistency or supervening existingstatutory inconsistency. Assuming that the Kerala Act was validGin its application to NBFCs when it was made, on the ground thatthe business of money lending is traceable to Entry 30 of List II,it has to give way for the parliamentary enactment. The momentthe Parliament stepped in to codify the law relating to registrationand regulation of NBFCs, by inserting certain provisions inChapter III-B of the RBI Act, the same would cast a shadow onH

the applicability (even assuming it is applicable) of the provisionsof the Kerala Act to NBFCs registered under the RBI Act andregulated by RBI. [Para 8][1041-E-F]

19. This Court held that repugnancy under Article 254 wouldarise only if both the Parliamentary law and the State law arereferable to List-III. Once it is clear that the RBI Act is traceableonly to the Entries in List-I and the State enactments are traceableonly to an Entry in List-II, the question of repugnancy underArticle 254 does not arise, as has been held in InnoventiveIndustries Limited. But in cases of this nature, Article 246(1)would squarely apply. [Paras 8.2, 8.3][1044-B-D]

Is the argument of Conflict, a mirage?

20. It was argued on behalf of the State that without pointingout any area of conflict between the two enactments the NBFCscannot invoke either Article 246 or Article 254. [Para 9][1045-D]

21. But the above argument has no substance. Once it isadmitted that the RBI Act is traceable to an entry in List-I, Article246(1) comes into play. In any case, there are also areas of conflict.[Para 9.1][1045-D-E]

Overriding Effect

22. Section 45-Q which confers overriding effect uponChapter III-B, over other laws. Therefore, the States of Gujaratand Kerala cannot contend that the laws made by them are inaddition to the provisions of Chapter III-B. [Para 10][1046-B]

23. Though it was contended by the learned counselappearing for the State of Gujarat that the Gujarat Act exemptsNBFCs registered under the RBI Act from seeking registrationunder the Gujarat Act, the same would go to the rescue of Stateof Gujarat. Under Section 5(2) of the Gujarat Act, NBFCsregistered under the RBI Act are deemed to have beenregistered under the Gujarat Act. Therefore, all other provisionsof the Gujarat Act are sought to be applied to NBFCs operatingin the State of Gujarat. The other provisions of the Gujarat Actinclude the (i) power of search and seizure; (ii) requirement to A

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Amaintain certain books and registers and to furnish statements;and (iii) the mandate not to dispose of any article taken from adebtor as a pawn, pledge or security, before a period of two yearsfrom the date stipulated for final payment, etc. The Gujarat Actalso empowers the Civil Court under Section 30 to reopen certaintransactions and to limit the interest recoverable. Section 32 ofBthe Gujarat Act empowers the borrower to deposit the moneybefore a Civil Court and the civil Court to assume jurisdiction ofthe adjudication of the dispute. Interestingly, Gujarat Act, 2011tacitly recognizes the regulation of NBFCs under the RBI Act.Yet the State got the assent of only the Governor. [Paras 10.1,C10.2][1046-C-F]

24. The Kerala Act and the Gujarat Act will have noapplication to NBFCs registered under the RBI Act and regulatedby RBI. Therefore, all the appeals filed by NBFCs against thejudgment of the Kerala High Court are allowed. Likewise theDappeals filed by the State of Gujarat against the judgment of theGujarat high Court are dismissed. [Para 11][1046-G]

Deep Chand vs. State of U.P. AIR 1959 SC 648 : [1959]Suppl. SCR 8 – followed.

Internet and Mobile Association of India vs. ReserveEBank of India (2020) 10 SCC 274 : [2020] 2 SCR 297;Innoventive Industries Limited vs. ICICI Bank and Anr.(2018) 1 SCC 407 : [2017] 8 SCR 33 – relied on.

Integrated Finance Company Limited vs. Reserve Bankof India and Others (2015) 13 SCC 772 : [2013] 13FSCR 938; Zaverbhai Amaidas vs. State of Bombay AIR1954 SC 752 : [1955] SCR 799; Tika Ramji vs. State ofU.P. AIR 1956 SC 676 : [1956] SCR 393; UCO Bankand Another vs. Dipak Debbarma and Others (2017) 2SCC 585 : [2016] 11 SCR 723; State of West BengalGand Others vs. Committee for Protection of DemocraticRights, West Bengal and Others (2010) 3 SCC 571 :[2010] 2 SCR 979; Kailash Sonkar vs. Smt. Maya Devi(1984) 2 SCC 91 : [1984] 2 SCR176 – referred to.

NEDUMPILLI FINANCE COMPANY LIMITED v. STATE OFKERALA & ORS.

CIVIL APPELLATE JURISDICTION : Civil Appeal No.5233of 2012.

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From the Judgment and Order dated 18.11.2009 of the High Courtof Kerala at Ernakulam in W.A. No.1379 of 2008.

With

Civil Appeal Nos.5230, 5190, 5191, 5184, 5241, 5185, 5111, 5188,5187, 5183 And 5113 of 2012, Civil Appeal @ Special Leave Petition(Civil) No.8331 of 2015, Transfer Petition (Crl.) No.359 of 2015, CivilAppeal Nos.5186, 5192, 5189, 5112, 5232, 5231, 5234, 5237, 5238 And5315 of 2012, Civil Appeal Nos.18786-18787 Of 2017, Civil AppealNo.1324 of 2015 And Civil Appeal No.7836 Of 2012

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Jaideep Gupta, Guru Krishna Kumar, A. K. Singh, G. Umapathy,Kodanda Ram, Rana Mukherjee, Sr. Advs., Nishe Rajen Shonker, Ms.Anu K. Joy, Alim Anvar, Ms. Manicka Priya S., Riddhi Bose, NikhilSwami, Ms. Divya Swami, Ms. Prabha Swami, Tanmaya Agarwal, WrickChatterjee, Sonal Kumar Singh, Anish Jaipuria, Gaurav Rai, UpendraMishra, Ashish Ranjan, Rajat Navet, Kushagra Pandit, Pradeep KumarBakshi, A. Raghunath, Ms. Bina Madhavan, Tushar Gupta, M/s LawyerS. Knit & Co., Balaji Srinivasan, Prateek Yadav, Mohd. Shahrukh, Ms.Archana Pathak Dave, Ms. Deepanwita Priyanka, Pratap Venugopal,Ms. Surekha Raman, Deelip, Akhil Abraham Roy, Vijay Valsan for M/sK. J. John and Co., Naresh Kaushik, Manoj Joshi, Vardhman Kaushik,B. Purushottam Reddy, R. Anand Padmanabhan, A. Raghunath, Anuj F

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ABerry, Vibhore Yadav, S. S. Shroff, K. V. Mohan, K. V. Balakrishnan, P.S. Prasanth, Vikas Mehta, Ms. Akanksha Vigyan, E. M. S. Anam, M. P.Vinod, Atul Shankar Vinod, Dileep Pillai, Ajay Kumar Jain, T. L. V.Ramachari, Hitesh Kumar Sharma, Akhileshwar Jha, T. N. Rama Rao,E. Vinay Kumar, Naresh Kumar, Sanjeev Singh, Ms. Kajal Bhatia, Ms.Sudhanshu Palo, Budha Dev Palo, Abhilas Kumar Tripathi, Ms. PadmaBChaudhary, B. Jagannath Rao, Ramesh Babu M. R., Ms. Manisha Singh,Ms. Nisha Sharma, Ms. Jagriti Bharti, Ms. Mukti Chowdhary, Manoj,Ms. Aparna Sinha, Ms. Oindrilla Sen, Manu Nair, Neelabh Shreesh,Abhisth Kumar, Mrs. Lalita Kaushik, Jogy Scaria, C. K. Sasi, M. T.George, Ms. Susy Abraham, Johns George, S. Gowthaman, Advs. forCthe appearing parties.

The Judgment of the Court was delivered by

V. RAMASUBRAMANIAN, J.

1. The question as to whether Non-Banking Financial CompaniesD(for short “NBFCs”) regulated by the Reserve Bank of India, in termsof the provisions of Chapter III-B of the Reserve Bank of India Act,1934 (hereinafter referred to as “RBI Act”) could also be regulated byState enactments such as Kerala Money Lenders Act, 1958 (hereinafterreferred to as “Kerala Act”) and Gujarat Money Lenders Act, 2011(hereinafter referred to as “Gujarat Act”), has arisen for ourEconsideration in these appeals, with the Kerala and Gujarat High Courtstaking opposite views.

2. We have heard the learned counsel for the respective parties,the learned senior counsel appearing for the State of Kerala, the learnedstanding counsel appearing for the State of Gujarat and the learned counselFappearing 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 asfollows:-G

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 controlof the business of money lending in the State of Kerala. The statementHof objects and reasons spelt out, that by passing the said enactment, “it was intended to regulate the interest to be charged by money lendersand to provide protection to borrowers”. At the time when this Actwas enacted, the concept of non-banking financial companies was notvery familiar in India. Therefore, the Reserve Bank of India and theParliament had not stepped in to regulate financial companies whichwere not banks or banking companies.

3.2 It appears that after the mushroom growth of NBFCs, theGovernment of Kerala started insisting upon NBFCs to take a licenseunder the Kerala Act, failing which penal consequences were threatened.Therefore, after unsuccessfully approaching the Government of Keralafor exemption, NBFCs filed a batch of writ petitions on the file of theHigh Court of Kerala.

3.3 A learned Judge of the High Court of Kerala dismissed thebatch of writ petitions and the said order was confirmed by the DivisionBench of the High Court. Therefore, NBFCs operating in the State ofKerala 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 registeredunder 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 NBFCby name Bajaj Finance Limited, seeking a transfer of the quash petitionpending on the file of the High Court of Kerala under Section 482 of theCode of Criminal Procedure praying for quashing an FIR registeredunder the Kerala Act.

GUJARAT

3.5 The Bombay Money Lenders Act, 1946, which was applicablein the State of Gujarat, was sought to be invoked by the Registrar in theoffice of the Prevention of Money Lenders, against NBFCs operating inthe State of Gujarat, in the year 2009. Challenging the action so initiated,NBFCs filed a batch of special civil applications before the High Courtof Gujarat. When it was pending, the decision of the Kerala High Courtcame. But disagreeing with the view taken by the Kerala High Court, alearned Judge of the Gujarat High Court quashed the notices issued tothe NBFCs under the Bombay Money Lenders Act, by a judgment dated13.01.2010.

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1016SUPREME COURT REPORTS

A3.6 Thereafter, the legislature of the State of Gujarat passed theGujarat Act, 2011 (Gujarat Act 14 of 2011) which received the assent ofthe Governor on 6.04.2011 and was published in the Gujarat GovernmentGazette on 8.04.2011.

3.7 Therefore, a fresh batch of special civil applications wereBfiled, seeking a declaration that the provisions of the Gujarat Act 14 of2011 are not applicable to NBFCs registered under the RBI Act. TheDivision Bench of the High Court allowed the special civil applicationsholding that Gujarat Act 14 of 2011 is ultra vires the Constitution forlegislative incompetence, to the extent that it seeks to have control overNBFCs registered under the RBI Act. A consequential direction wasCalso issued by the Gujarat High Court restraining the State Governmentfrom applying the provisions of the Gujarat Act against NBFCs registeredunder the RBI Act. Therefore, the State of Gujarat has come up withCivil Appeals.

Scheme of Kerala Act, Gujarat Act and RBI ActD

4. In the background of the facts narrated above, the legal issuearising for consideration has to be resolved by looking at the scheme ofthe two State enactments, the scheme of RBI Act and the relevantEntries in the appropriate List of the Seventh Schedule, to which theseenactments can be traced.E4.1 List-I of the Seventh Schedule to the Constitution containsthree 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 ofFtrading corporations including banking, insurance andfinancial corporations but not including cooperative societies.

(iii) Entry No.45: Banking

4.2 List II (State List) of the Seventh Schedule contains anentry in Entry No.30, which reads: “money lending and money lenders;Grelief of agricultural indebtedness”.

4.3 Therefore, any State enactment regulating the business ofmoney lending and intended to afford protection to borrowers, may fallunder Entry No.30 of List-II. But at the same time any parliamentaryenactment dealing with incorporation, regulation and winding up ofHfinancial corporations, would fall under Entry No.43 in List-I.

4.4 Therefore, at the outset, it is clear that the competence of thelegislatures of the States of Kerala and Gujarat to enact a law for theregulation of the business of money lending cannot be questioned, astheir power is traceable to Entry 30 of List-II of the Seventh Schedule.But at the same time, we will have to see whether after the enactmentof a law by the Parliament for the incorporation and regulation of financialcorporations, such financial corporations would continue to be regulatedalso by the State enactments, on the ground that they may also fall withinthe definition of the expression “money lenders” under the Stateenactments.

4.5 For finding an answer to the above question, it may be usefulto take a bird’s eye view of the scheme of the Kerala and Gujarat Stateenactments.

Broad scheme of Kerala Act

4.6 In a way, the Kerala Act is a legacy of the Madras PawnBrokers Act, 1943, whose provisions continued to be in force in theMalabar District, even after the States Reorganisation Act, 1956, until itwas repealed by Kerala Money Lenders (Amendment) Act 33 of 1963.

4.7 As seen from the statement of objects and reasons, the onlyobject of the Kerala Money Lenders Act was to afford protection toborrowers from unscrupulous money lenders who advanced usuriousloans. Though it was proclaimed in the statement of objects, in generalterms, that it was intended to regulate the business of money lending, theAct was primarily intended only to cover one aspect of the business offinancing.

4.8 Section 2(7) of the Kerala Act, defines a “money lender” asfollows:- “2. Definitions. xxxxxxxxx

(7) “money-lender” means a person whose main or subsidiaryoccupation is the business of advancing and realising loansor acceptance of deposits in the course of such business andincludes any person appointed by him to be in charge of abranch office or branch offices or a liaison office or anyother office by whatever name called, of his principal placeof business and a pawn broker, but does not include- (a)a bank or a co-operative society; or A

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A(b)the Life Insurance Corporation of India establishedunder section 3 of the Life Insurance Corporation Act,1956 (Central Act 31 of 1956); or (bb) the Industrial Credit and Investment Corporation ofIndia Limited incorporated under the India CompaniesAct, 1913 (7 of 1913); B

(c) the Industrial Finance Corporation established undersection 3 of the Industrial Finance Corporation Act,1948 (Central Act 15 of 1948); or (d)x x x x C

(e) the State Financial Corporation established undersection 3 of the State Financial Corporation Act, 1951(Central Act 63 of 1951); or (f)any institution established by or under an Act ofParliament or the Legislature of a State, which grantsany loan or advance in pursuance of the provisions ofthat Act or, D

(g) any other institution in the public sector, whetherincorporated or not exempted by the Government bynotification.

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Explanation I.—Where a person, who carries on in the Stateof Kerala the Business of advancing and realising loans isresident outside the State, the agent of such person residentin the State shall be deemed to be the money-lender in respectFof that business for the purposes of this Act.

Explanation II.— For the purposes of this Clause, clause (7A),Proviso to sub-section (1) of section 3, clause (a) of sub-section (3) of section10, [section 16B] and section 17, theword “person” shall include “a firm or a joint family;””

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4.9 As seen from the definition, 7 different types of business entitiesare excluded from the definition of the expression “money lending”. Afinancial corporation which is not a bank and which is otherwise knownas NBFC, is not listed as one of the entities excluded from the definitionof the expression “money lender”.

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4.10 A bank is excluded from the definition of the expression“money lender”, by virtue of clause (a). But the word “bank” is definedin Section 2(1A) as follows:- “Sec. 2 (1A) “bank” means-

(i) a banking company to which the Banking RegulationAct, 1949 (Central Act 10 of 1949), applies;

(ii) the State Bank of India constituted under the State Bankof India Act, 1955 (Central Act 23 of 1955);

(iii) a subsidiary bank as defined in clause (k) of section ofthe State Bank of India (Subsidiary Banks) Act. 1939(Central Act 38 of 1959);

(iv) the Industrial Development Bank of India establishedunder the Industrial Development Bank of India Act,1964 (Central Act 18 of 1964);

(v) a corresponding new bank constituted under section 3of the Banking Companies (Acquisition and Transferof Undertakings) Act, 1970 (Central Act 5 of 1970);

(vi) a Regional Rural Bank established under the RegionalRural Banks Act, 1976 (Central Act 21 of 1976);

(vii) a corresponding new bank constituted under section 3of the Banking Companies (Acquisition and Transferof Undertakings) Act, 1980 (Central Act 40 of 1980);

(viii) the Export Import Bank of India established under theExport Import Bank of India Act, 1981, (Central Act 28of 1981);

(ix) the National Bank for Agriculture and RuralDevelopment established under the National Bank forAgriculture and Rural Development Act, 1981 (CentralAct 61 of 1981);

(x) the Industrial Reconstruction Bank of India establishedunder the Industrial Reconstruction Bank of India Act,1984 (Central Act 62 of 1984); 4.11 The Banking Regulation Act, 1949 defines a “bankingcompany” under Section 5(c) as follows:- A

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“A5. Interpretation –

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(c) “banking company” means any company which transactsthe business of banking in India; Explanation. - Any company which is engaged in theBmanufacture of goods or carries on any trade and whichaccepts deposits of money from the public merely for thepurpose of financing its business as such manufacturer ortrader shall not be deemed to transact the business of bankingwithin the meaning of this clause;”

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4.12 The word “banking” itself is defined in Section 5(b) of theBanking Regulation Act, 1949 as follows:- “5. Interpretation –

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D(b) “banking” means the accepting, for the purpose of lendingor investment, of deposits of money from the public, repayableon demand or otherwise, and withdrawal by cheque, draft,order or otherwise;”

4.13 By virtue of the definition of the word “banking” containedin Section 5(b) of the Banking Regulation Act, 1949, an institution orEbusiness entity which does not accept deposits of money from the public,either for the purpose of lending or for the purpose of investment, willnot be a banking company. While a banking company may be involved inboth the business of accepting deposits and lending money, a financialinstitution which is engaged only in the business of lending, may not beFcovered by the definition of the expression “banking company” underthe Banking Regulation Act, 1949.

4.14 Since NBFCs which do not accept deposits from the publicdo not come within the purview of the Banking Regulations Act, theReserve Bank of India Act, 1934 had to step in. To make things moreGclear that there is no duplication of control, Section 45-H of the RBI Actstates that the provisions of Chapter III-B shall not apply to a BankingCompany as defined in Section 5 of the Banking Regulation Act.

4.15 But the definition of “money lender” in the Kerala Actexcludes only a “bank” to which the Banking Regulation Act applies. Itdoes not exclude a non banking institution from the definition. Therefore,H

the Kerala State authorities started claiming and technically rightly so,that NBFCs are not excluded from the definition of “moneylender”.Though the NBFCs claimed that under clause (f) of sub-section (7) ofSection 2, “any institution established by or under an Act ofParliament or the Legislature of a State” are excluded from thedefinition of the expression “money-lender” and that NBFCs areestablished under a Parliamentary enactment, this argument was foundby the State to be based on a convoluted logic. We also think that theState was right in thinking so, since NBFCs are not established by orunder an Act of Parliament or the legislature of a State.Incorporation/registration of a business entity under an Act ofParliament or the Legislature of a State, is completely different frombeing established by or under an Act. For instance, all companies areincorporated under the Companies Act. But a corporation like the LICof India, is established under the LIC of India Act. Therefore, theappellants were not right in claiming that they fall under the exclusionclause in clause (f) of sub-section (7) of Section 2. Keeping this aspectin 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 licenceunder the Act;

(ii) To prohibit any person from carrying on or continuing thebusiness of money lending without licence;

(iii) To prevent money lenders from charging interest at a ratehigher than the rate prescribed under the Act;

(iv) To prevent money lenders from giving any gifts,commissions or presents other than the interest provided inSection 4(2) to any depositor;

(v) To enable the debtor to deposit the money due in respect ofa loan, into any Court having jurisdiction to entertain a suitfor recovery of the loan and to seek the recording of full orpart satisfaction of the loan;

(vi) To make it mandatory for money lenders to keep books ofaccounts and to give receipts;

(vii) To make it compulsory for a pawn broker to issue a pawnticket, the possession of which will give rise to a presumptionthat the holder of the pawn ticket has a right to redeem thepledge; A

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A(viii) To prescribe the procedure for redemption of pledge, saleof pledge and compensation for depreciation of pledge;

(ix) To appoint inspectors with certain powers of inspection andsearch;

(x) To empower the licensing authority to demand additionalsecurity from the money lender, if there is excess of liabilitiesover the assets of the money lenders at any time; and B

(xi) Providing for cancellation of licence, forfeiture of securityand imposing penalty for violation of the provisions of theAct.

C

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 pawn-broker orunincorporated company (i) who/which carries on the business ofDmoney lending in the State or (ii) who/which has his principal orsubsidiary place of such business in the State”.

5.2 The expression “business of money lending” is defined inSection 2(3) to mean “the business of advancing loans, whether incash or kind and whether or not in connection with or in addition toEany other business and includes the business of payment of loan byan agreement under any law for the time being in force”.

5.3 By virtue of the aforesaid definitions, the application of theGujarat Act to any business entity/individual revolves around the definitionof the word “loan”. It is defined in Section 2(9) as follows:

F

“loan” means an advance whether of money or in kind, at aninterest, with or without security, and includes advance,discount, money paid for or on account of or on behalf of orat the request of any person, or the forbearance to requirepayment of money owing on any account whatsoever, andGevery agreement under any law for the time being in force(whatever its terms or form may be) which is in substance oreffect a loan of money, but does not include –

(a) a deposit of money or other property in a Governmentpost office, a bank, a company or a co-operative society; H

(b) a loan to, or by, or a deposit with any society or associationregistered under the Societies Registration Act, 1860, or anyother enactment relating to a public, religious or charitableobject;

(c) a loan advanced by the State Government or by any localauthority authorized by the State Government; (d) a loan advanced to a Government employee from a fund,established for the welfare or assistance of Governmentemployees and which is sanctioned by the State Government; (e) a deposit of money with or a loan advanced by acooperative society; (f) an advance made to a subscriber to, or a depositor in, aprovident fund from the amount standing to his credit in thefund in accordance with the rules of the fund; (g) a loan to or by an insurance company as defined in theInsurance Act, 1938; (h) a loan advanced by a Government company as defined inthe Companies Act, 1956;

(i) an advance made bona fide by any trader carrying onany business, other than money-lending, if such advance ismade in the regular course of such business; (j) a loan advanced by the National Bank for Agricultureand Rural Development established under the National Bankfor Agriculture and Rural Development Act, 1981; (k) a loan advanced by the Export-Import Bank of Indiaestablished under the Export-Import Bank of India Act, 1981;

(l) a loan advanced by the Small Industries Development Bankof India, established under the Small Industries DevelopmentBank 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 Corporationsestablished under the State Financial Corporations Act, 1951; and A

B

C

D

E

F

G

H

1024SUPREME COURT REPORTS

A(o) a loan advanced by any institution - (1) established by orunder an Act of Parliament or the legislature of a State, whichgrants any loan or advance in pursuance of the provisionsof that Act, or (2) notified in this behalf by the StateGovernment, in consultation with the Reserve Bank; B5.4 By virtue of the aforesaid definitions, the authorities under theGujarat 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;C

(ii) To prohibit any person from carrying on the business ofmoney lending without a valid certificate of registration inrespect of the area concerned;

(iii) To empower the Registrar General, Registrar and otherDofficers appointed under the Act to require the productionof records and documents and to carry out searches andseizures;

(iv) To mandate every money lender to keep and maintainproper books of Accounts and other registers; E(v)To make it obligatory for money lenders to file yearlystatement of accounts of each of the debtors;

(vi) To prohibit the disposal of any article taken by a moneylender from a debtor as a bond, pledge or security for theloan advanced, for a period of two years from the dateFstipulated for financial repayment of the loan;

(vii) To regulate the powers of the Civil Court while decidingthe suits to which the Act applies, so that the Court is satisfiedthat the provisions of the Act are complied with;

(viii) To curtail the power of the Court to award interest in a sumGgreater than the principal of the loan due on the date of thedecree;

(ix) To empower the Court to allow payment of the decretalamount by instalments;

(x) To empower the Court even to reopen past transactions;H

(xi) To enable the borrower to deposit the amounts due inArespect of a loan into Court;

(xii) To empower the State Government to fix the maximumrate of interest, for any local area or class of business;

(xiii) To prohibit money lenders from receiving from the debtor,Bany amount by way of costs, charges or expenses;

(xiv) To make it obligatory for the money lender to provideadvance information, whenever the loan is assigned to athird party;

(xv) To prohibit money lenders from accepting any promissorynote, acknowledgment, bond or other writing which doesnot state the actual amount of loan or which states theamount wrongly or which contains erasures or over-writing;and C

(xvi) To provide for penalties for contravention of the provisionsof the Act.

D

5.6 It may be of interest to note that Section 39 of the Gujarat Actcontains a very strange provision which reads as follows:- “Notwithstanding anything contained in this Act or any otherlaw for the time being in force, no money lender shall recoverthe principal of the loan advanced by him or the interestthereon either in part or in whole except in cash.”

E

5.7 Though we are not concerned with the validity of such aprovision we could not resist the temptation to take note of the saidprovision which is in the teeth of Section 269-SS of the Income Tax Act,1961.

F

6. Role of RBI, the scheme of Chapter III-B of the RBI Actand the Regulatory measures taken by RBI from time to time 6.1 As observed by this Court in Internet and Mobile AssociationGof India vs. Reserve Bank of India[1], “the role of a Central Banksuch as the Reserve Bank, in an economy, is to manage (i) thecurrency; (ii) the money supply and (iii) interest rates”. One of theobjects the Reserve Bank of India Act, 1934 as spelt out in its preamble H

Ais “to operate the currency and credit system of the country to itsadvantage”.

6.2 Therefore, in contrast to the state enactments regulating thebusiness of money lending, whose one-eyed focus is only the protectionof borrowers, the RBI Act takes a holistic approach to the business ofBbanking, money lending and operation of the currency and credit systemof the country. But when RBI Act was enacted, the business of bankingand finance was not as complicated as it later turned out to be.

6.3 In the early 1960s, the Government found it necessary toregulate institutions which were not banks, but which were carrying onCother businesses allied to banking. Therefore, a bill to amend the RBIAct, The Banking Companies Act, 1949, and the State Bank of India(Subsidiary Banks) Act, 1959 was introduced in November, 1963. TheStatement of Objects and Reasons spelt out that the existing enactmentsrelating to banks did not provide for any control over such banks orinstitutions and that therefore it was felt necessary that the RBI shouldDbe enabled to regulate the conditions on which deposits may be acceptedby non-banking companies or institutions, for the purposes of ensuringmore effective supervision and management of the monetary and creditsystem by the Reserve Bank. One of the important objects spelt out inthe Statement of Objects and Reasons reads as follows:-E“The Reserve Bank should also be empowered to give to anyfinancial institution or institutions directions in respect ofmatters, in which the Reserve Bank, as the central bankinginstitution of the country, may be interested from the point ofview of the control of credit policy”

FClause (5) of the Notes on Clauses accompanying the Bill readas follows:- “Clause 5.-A new Chapter is proposed to be introduced in theReserve Bank of India Act for enabling that bank to obtain returnsand information from (a) certain financial institutions, namely, firms,companies or other bodies corporate which are financing trade,Gindustry, commerce or agriculture, or are carrying on as a part oftheir business the acquisition of shares, stocks, bonds, debenturesor other securities, or are engaged mainly in the financing of hire-purchase transactions and (b) non-banking institutions acceptingdeposits from members of the general public. The objects in viewHare to provide for-

(i) the supervision and control of the financial institutionsmentioned above in the interests of better or more effective controlof credit, and

(ii) the regulation of the business of acceptance of depositsby these and other non-banking institutions, in the public interest.

The Reserve Bank will be empowered to provide, by general orspecial order, for the forms in which returns and information areto be furnished to it, and also to give directions to any class ofinstitutions or to any institution in particular for the purposesspecified. The Reserve Bank will also be enabled to carry outinspections, where necessary, for carrying out the purposes ofthe new Chapter.”

6.4 Accordingly, the Banking Laws (Miscellaneous Provisions Act),1963, was enacted, amending the provisions of the aforesaid threeParliamentary enactments. It was by this amendment which came intoforce on 01.02.1964 that Chapter III-B was inserted in RBI Act. TheChapter heading for this Chapter read as, “Provisions Relating to Non-Banking Institutions Receiving Deposits and Financial Institutions”.However, this Chapter III-B was made inapplicable under Section 45-Hto a banking company as defined in Section 5 of the Banking CompaniesAct, 1949. Section 45-I defined a ‘financial institution’ under clause(c) to mean any non-banking institution which carries on the business offinancing or the business of acquisition of shares, stocks etc., or thebusiness of hire-purchase transactions.

6.5 Chapter III-B as it was introduced by the Banking Laws(Miscellaneous Provisions Act), 1963, contained no spell-binding or path-breaking provisions. Broadly, Chapter III-B as it was originally introducedin 1963, (i) empowered RBI to regulate or prohibit the issue of prospectusor advertisement soliciting deposits of money; (ii) empowered the RBIto collect information from non-banking institutions about deposits andto give directions; (iii) empowered the RBI to call for information fromfinancial institutions and to give directions, for the purpose of regulatingthe credit system of the country; (iv) obliged the non-banking institutionsto furnish statements to the RBI; (v) provided for inspection by RBI;(vi) prescribed penalties for any violation and conferred overriding effectto Chapter III-B over other laws.

6.6 After the introduction of Chapter III-B under Act 55 of 1963,three amendments which are not relevant for our purpose, were made A

B

C

D

E

F

G

H

1028

Ato the provisions contained in Chapter III-B, under Act 51 of 1974, Act21 of 1976 and Act 1 of 1984.

6.7 Post the insertion of Chapter III-B under Act 55 of 1963, theworking of non-banking financial intermediaries came to be reviewedby two study groups, one under the chairmanship of Dr. BhabhatoshBDatta in 1971 and another under the chairmanship of Shri James Raj in1975. 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 Committee-1985); (ii) the Working Group on the MoneyMarket (Vaghul Committee-1987); and (iii) the Committee on theCFinancial System (Narasimham Committee-1991).

6.8 Those reports and various socio-economic and political factorsled to the liberalisation of the economy in 1991. The liberalisation of theeconomy saw the growth of non-banking financial services sector inIndia accompanied by a corresponding growth in the number of NBFCsDoffering a diversified range of financial services and products. Therefore,a need was felt for rationalisation of the regulatory framework for thesecompanies keeping in view the trend towards liberalisation of economyin general and the financial sector in particular. In order to make an in-depth study of the role of NBFCs and to suggest regulatory and controlEmeasures 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 insimple terms[2] were:-

(i) To review the role of various categories of non-bankingFfinancial intermediaries;

(ii) To review the provisions of the RBI Act, 1934; Non-BankingFinancial Companies (Reserve Bank) Directions 1977,Miscellaneous Non-Banking Companies (Reserve Bank)Directions, 1977; Residuary Non-Banking companiesG(Reserve Bank) Directions, 1987; The National HousingBank Act, 1987 and The Housing Finance Companies(NHB) Directions, 1989; 2 Report of the Working Group on Financial Companies C.R. 483 submitted inHSeptember, 1992

(iii) To enquire into the methods of operation of non-bankingAfinancial intermediaries and to recommend measures forensuring their orderly growth and in particular, the eligibilitycriteria for their entry, growth and exit, their viability, capitaladequacy, liquidity ratio, debt equity ratio, creditconcentration ratio, disclosure requirements and otherBprudential norms; A

(iv) To consider the adequacy of the supervision and control ofRBI over such institutions and suggest measures for furtherstrengthening them; C

(v) To examine the adequacy of protection to depositors’money; and

(vi) To make recommendations on any other related matter.

6.9 The Working Group chaired by Dr. A.C. Shah, took note ofthe fact that the total number of NBFCs which stood at 7063 in 1981increased to 24,009 by 1990 and that there were different categories ofNBFCs operating in the country such as loan companies, investmentcompanies, hire-purchase finance companies, equipment leasingcompanies, mutual benefit finance companies, miscellaneous financecompanies, miscellaneous non-banking companies, residuary non-bankingcompanies and housing finance companies. This Working Group actuallyrecommended in paragraph 6.72 of its Report that though NBFCs werebeing regulated by the directions issued under Chapter III-B of the RBIAct and Chapter-V of the NHB Act, it would be better to enact a separatelegislation. The Working Group went to the extent of recommendingthat such a legislation should be put under Schedule IX of the Constitution.

DE

F

6.10 All the above led to the promulgation of the Reserve Bank ofIndia (Amendment) Ordinance, 1997 on 09.01.1997. Subsequently, a billwas introduced which became the Reserve Bank of India (Amendment)Act, 1997. This Act completely revamped Chapter III-B by amendingthe definition provision in Section 45-I and inserting certain new provisionssuch as Section 45-IA, 45-IB, 45-IC, 45-JA, 45-MB, 45-MC etc. Afterthe amendment made to Chapter III-B by Act 23 of 1997, this Chapterhas become a complete Code in so far as NBFCs are concerned. Thiscan be seen from various provisions of Chapter III-B, which is summarizedin the form of a table for easy reference as follows:- G

H

ABCDEFGH

[2022] 7 S.C.R.

6.11 The above scheme of Chapter III-B of the RBI Act showsthat the power of intervention available for the RBI over NBFCs, isfrom the cradle to the grave. In other words, no NBFC can carry onbusiness without being registered under the Act and a NBFC whichtakes birth with the registration under the Act is liable to be wound up atthe instance of the RBI. The entire life of a NBFC from the womb tothe tomb is also regulated and monitored by RBI.

6.12 At this juncture it may be ideal to extract some of the relevantprovisions of Chapter III-B.

6.13 A Non-banking financial company is defined in clause (f) ofSection 45-I as follows:- A

B

C

D

E

F

G

H

A“45-I.

(f) “non-banking financial company” means –

(i) a financial institution which is a company;

(ii) a non-banking institution which is a company andBwhich has as its principal business the receiving ofdeposits, under any scheme or arrangement or in anyother manner, or lending in any manner;

(iii) such other non-banking institution or class of suchinstitutions, as the Bank may, with the previousCapproval of the Central Government and bynotification in the Official Gazette, specify.”

6.14 Section 45-JA which gives power to the RBI to determinethe policy and issue directions, reads as follows:- D

“45JA. Power of Bank to determine policy and issuedirections. — (1) If the Bank is satisfied that, in the public interestor to regulate the financial system of the country to its advantageor to prevent the affairs of any non-banking financial companybeing conducted in a manner detrimental to the interest of theEdepositors or in a manner prejudicial to the interest of the non-banking financial company, it is necessary or expedient so to do, itmay determine the policy and give directions to all or any of thenon-banking financial companies relating to income recognition,accounting standards, making of proper provision for bad anddoubtful debts, capital adequacy based on risk weights for assetsFand credit conversion factors for off balance-sheet items and alsorelating to deployment of funds by a non-banking financial companyor a class of non-banking financial companies or non-bankingfinancial companies generally, as the case may be, and such non-banking financial companies shall be bound to follow the policy soGdetermined and the direction so issued.

(2) Without prejudice to the generality of the powers vestedunder sub-section (1), the Bank may give directions to non-bankingfinancial companies generally or to a class of non banking financialcompanies or to any non-banking financial company in particularHas to—

(a) the purpose for which advances or other fund basedAor non-fund based accommodation may not be made;and (b)the maximum amount of advances or other financialaccommodation or investment in shares and othersecurities which, having regard to the paid-up capital,Breserves and deposits of the non-banking financialcompany and other relevant considerations, may bemade by that non-banking financial company to anyperson or a company or to a group of companies.”

C

6.15 Section 45-K which empowers the RBI to collect informationreads as follows:- “45K.Power of Bank to collect information from non-banking institutions as to deposits and to give directions.–

(1) The Bank may at any time direct that every non-bankinginstitution shall furnish to the Bank, in such form, at such intervalsand within such time, such statements information or particularsrelating to or connected with deposits received by the non-bankinginstitution, as may be specified by the Bank by general or specialorder.

D

E

(2) Without prejudice to the generality of the power vestedin the Bank under sub-section (1), the statements, information orparticulars to be furnished under sub-section (1), may relate to allor any of the following matters, namely, the amount of the deposits,the purposes and periods for which, and the rates of interest andother terms and conditions on which, they are received.

F

(3) The Bank may, if it considers necessary in the publicinterest so to do, give directions to non-banking institutions eithergenerally or to any non-banking institution or group of non-bankinginstitutions in particular, in respect of any matters relating to orconnected with the receipt of deposits, including the rates of interestpayable on such deposits, and the periods for which deposits maybe received.

G

(4) If any non-banking institution fails to comply with anydirection given by the Bank under sub-section (3), the Bank mayprohibit the acceptance of deposits by that non-banking institution.

H

1[***]

A

(6) Every non-banking institution receiving deposits shall, ifso required by the Bank and within such time as the Bank mayspecify, cause to be sent at the cost of the non-banking institutiona copy of its annual balance-sheet and profit and loss account orother annual accounts to every person from whom the non-bankinginstitution holds, as on the last day of the year to which the accountsrelate, deposits higher than such sum as may be specified by theBank.”

B

6.16 Section 45-L empowers RBI to call for information and toCgive directions. It reads as follows:- “45L. Power of Bank to call for information from financialinstitutions and to give directions.—(1) If the Bank is satisfiedfor the purpose of enabling it to regulate the credit system of thecountry to its advantage it is necessary so to do, it may—

D

(a) require financial institutions either generally or anygroup of financial institutions or financial institution inparticular, to furnish to the Bank in such form, at suchintervals and within such time, such statements,information or particulars relating to the business of suchfinancial institutions or institution, as may be specifiedby the Bank by general or special order; E

(b) give to such institutions either generally or to any suchinstitution in particular, directions relating to the conductof business by them or by it as financial institutions orinstitution.

F

(2) Without prejudice to the generality of the power vestedin the Bank under clause (a) of sub-section (1), the statements,information or particulars to be furnished by a financial institutionGmay relate to all or any of the following matters, namely, the paid-up capital, reserves or other liabilities, the investments whether inGovernment securities or otherwise, the persons to whom, andthe purposes and periods for which, finance is provided and theterms and conditions, including the rates of interest, on which it isprovided.

H

(3) In issuing directions to any financial institution underclause (b) of sub-section (1), the Bank shall have due regard tothe conditions in which, and the objects for which, the institutionhas been established, its statutory responsibilities, if any, and theeffect the business of such financial institution is likely to have ontrends in the money and capital markets.”

6.17 One of the most important provisions contained in ChapterIII-B is Section 45-Q. It reads as follows:- “45Q. Chapter IIIB to override other Laws.—The provisionsof this Chapter shall have effect notwithstanding anythinginconsistent therewith contained in any other law for the timebeing in force or any instrument having effect by virtue of anysuch law.”

6.18 It is too long in the day to dispute the fact that the directionsissued by RBI are statutory in character and binding on all NBFCs. It isso, in respect of the directions issued both under the RBI Act and underthe Banking Regulation Act.

6.19 Once it is found that Chapter III-B of the RBI Act providesa supervisory role for the RBI to oversee the functioning of NBFCs,from the time of their birth (by way of registration) till the time oftheir commercial death (by way of winding up), all activities ofNBFCs automatically come under the scanner of RBI. As aconsequence, the single aspect of taking care of the interest of theborrowers which is sought to be achieved by the State enactmentsgets subsumed in the provisions of Chapter III-B.

Regulations/Master Circulars/Directions issued by RBIfrom time to time

Regulations/Master Circulars/Directions issued by RBIfrom time to time 6.20 Apart from the provisions of Chapter III-B, the regulations,directions and Master Circulars issued by RBI from time to time, alsobind the NBFCs. There is a long list of Regulations/directions or MasterCirculars issued by RBI from 1977 onwards, which shows that evenbefore the 1997 Amendment to the RBI Act, some kind of control wasexercised by RBI over NBFCs. After the 1997 amendment, every aspectof the business of NBFCs, including loans, is covered by Master Circulars/Directions issued by RBI. In other words, the only field occupied by the A

B

C

D

E

F

G

H

AState enactments stand appropriated by the Master Circulars/Directions.For demonstrating that even the subject of grant of loans is covered bythese Master Circulars/Directions, we present in the Table below, therelevant circulars/directions.

B

C

D

EF

G

H

1037ABC

D

EFGH

ABCD

ESince the Regulations, Master Circulars and Directions issued byRBI are binding on NBFCs, it is clear from the above that all aspects ofNBFCs are regulated by RBI and nothing is left untouched. However,there are certain categories of NBFCs, which may be exempt, by RBIitself, in exercise of the power conferred by section 45-NC of the Act,Ffrom the application of the provisions of RBI Act. Let us also take noteof them now.

NBFCs Exempt from RBI Act

6.21 Section 45-NC of the RBI Act confers power upon the RBIto declare by notification in the Official Gazette, that any or all of theGprovisions of Chapter III-B shall not apply to a NBFC or any class ofNBFCs, either generally or for a specified period, subject to suchrestrictions, limitations and conditions. In exercise of the power soconferred, RBI has been issuing Master Directions from time to time. AMaster Direction issued on 25.08.2016, updated as on April 01, 2022lists various categories of NBFCs exempt from the application of certainH

specified provisions of Chapter III-B. This is for the reason that some ofthose exempted companies are regulated by other regulatory bodies.For instance, Housing Finance Institutions are regulated by the NationalHousing Bank; Merchant Banking companies, Venture Capital FundCompanies and the like are regulated by SEBI; Nidhi companies andmutual benefit companies are regulated by the Ministry of Corporateaffairs; Chit Fund companies are regulated by State Governments; andInsurance Companies are regulated by IRDA. We are not concerned inthis case with the exempted companies, as the dispute on hand is confinedonly to NBFCs registered under the RBI Act.

-Is Chapter IIIB a complete code?

7. To find out whether NBFCs registered under Chapter III-B ofthe RBI Act and regulated by RBI could still be controlled by the Stateenactments, because of the definition of the expression “money lender”,we may first have to see whether Chapter III-B of the RBI Act is acomplete code or not. In Integrated Finance Company Limited vs.Reserve Bank of India and Others[3], this Court held in para 47 of theReport that “Chapter III-B of the RBI Act is a complete code in itself”.

7.1 We have seen that no NBFC can commence or carry onbusiness without obtaining the certificate of registration under the Act.We have also seen that their continuation in business would depend uponcompliance with certain prescriptions found in the RBI Act as well asthe circulars/directions issued by RBI. The RBI has the power tosupersede the Board of Directors of a NBFC and has power even towind up a NBFC. Thus the supervision and regulation of NBFCs, by theRBI, is from the time of birth till the time of death. If a statutoryenactment which provides for such a type of control and supervision isnot a complete code in itself, we do not know what else could be acomplete code.

7.2 It was argued by Mr. Jaideep Gupta, learned senior counselappearing for the State of Kerala that the Reserve Bank of India doesnot control the rate of interest charged by NBFCs on the loans advancedby them and that, therefore, a State enactment which seeks to controlthis aspect, namely, the rate of interest cannot be said to be repugnant.According to the learned senior counsel, a statutory enactment whichdoes not deal with such an important issue as the rate of interest AB

C

D

E

F

G

H

Achargeable 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 aConstitution Bench decision of the Supreme Court in Deep Chand vs.State of U.P[4].

7.3 But we do not agree. NBFCs which play a very vital role inBcontributing to the financial health of the country and whose operationsare controlled by RBI with the avowed object of operating the currencyand 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 atthe very root of the statutory control vested in RBI.C

7.4 It may be true that many times RBI may not be controlling therate of interest charged by NBFCs on the loans advanced by them. Itdoes not mean that they have no power to step in. The power to determinepolicy and issue directions, available under Section 45-JA can always beinvoked by RBI.D

7.5 However, it was contended by Mr. Jaideep Gupta, learnedsenior counsel for the State of Kerala that the power of the RBI underSection 45-JA to determine the policy and give directions, arecircumscribed by the words “relating to income recognition, accountingstandards, making of proper provision for bad and doubtful debts,Ecapital adequacy based on risk weights for assets and creditconversion factors for off balance-sheet items and also relating todeployment of funds”.

7.6 But we do not think that the words “relating to” appearing inSection 45-JA(1) can be taken to restrict the power of RBI to giveFdirections, only in relation to the matters mentioned after the words“relating to”. The items mentioned after the words “relating to” canonly be taken to be illustrative and not exhaustive. This is for the reasonthat the power conferred by Section 45-JA is both for determining thepolicy and for issuing directions.G7.7 Moreover, Sub-section (1) of Section 45-JA deals only withthe powers in general. This is made clear by the words “withoutprejudice to the generality of the powers vested under sub-Section(1)”, appearing in sub-Section (2) of Section 45-JA.

H4 AIR 1959 SC 648

7.8 In any case, Section 45L(1)(b) confers power upon the RBIto give directions to NBFCs “relating to the conduct of business bythem”. Therefore, to say that RBI has no power in respect of such animportant aspect, may not be correct. The fact that RBI generally leavesit to the market forces to determine the rate of interest, without anydirect intervention, is not something that could be taken advantage of bythe State of Kerala to step in and prescribe the maximum rate of interestchargeable by NBFCs on the loans advanced by them.

7.9 In Deep Chand (supra), the Constitution Bench of this Courtreiterated three important tests of inconsistency or repugnancy, namely,(i) whether there is direct conflict between the two provisions; (ii) whetherParliament intended to lay down an exhaustive Code in respect of thesubject matter replacing the Act of the State legislature; and (iii) whetherthe law made by Parliament and the law made by State legislature occupythe same field. Therefore, more than supporting the case of the State,Deep Chand (supra) actually supports the case of the NBFCs, as wehave found that Chapter III-B is a complete code in itself.

Doctrine of Eclipse, conflict and repugnancy

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 bysupervening constitutional inconsistency or supervening existingstatutory inconsistency. Assuming that the Kerala Act was valid in itsapplication to NBFCs when it was made, on the ground that the businessof money lending is traceable to Entry 30 of List II, it has to give way forthe parliamentary enactment. The moment the Parliament stepped into codify the law relating to registration and regulation of NBFCs,by inserting certain provisions in Chapter III-B of the RBI Act, thesame would cast a shadow on the applicability (even assuming it isapplicable) of the provisions of the Kerala Act to NBFCs registeredunder 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 theInsolvency and Bankruptcy Code, 2016 and the Maharashtra ReliefUndertakings (Special Provisions) Act, 1958. After taking note of Section107 of the Government of India Act, 1935 and Article 254 of theConstitution, this Court analysed the Constitutions of other jurisdictions A

B

C

D

E

F

G

H

Aon the question of inconsistency of laws and summarized the propositionsof law as follows:

“51. The case law referred to above, therefore, yields the followingpropositions :

51.1. Repugnancy under Article 254 arises only if both theParliamentary (or existing law) and the State law are referable toList III in the Seventh Schedule to the Constitution of India.

B

51.2. In order to determine whether the Parliamentary (or existinglaw) is referable to the Concurrent List and whether the Statelaw is also referable to the Concurrent List, the doctrine of pithand substance must be applied in order to find out as to where inpith and substance the competing statutes as a whole fall. It isonly if both fall, as a whole, within the Concurrent List, thatrepugnancy can be applied to determine as to whether oneparticular statute or part thereof has to give way to the other.

C

D

51.3. The question is what is the subject-matter of the statutes inquestion and not as to which entry in List III the competing statutesare traceable, as the entries in List III are only fields of legislation;also, the language of Article 254 speaks of repugnancy not merelyof a statute as a whole but also “any provision” thereof.

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E51.4. Since there is a presumption in favour of the validity ofstatutes generally, the onus of showing that a statute is repugnantto another has to be on the party attacking its validity. It must notbe forgotten that that every effort should be made to reconcilethe competing statutes and construe them both so as to avoidFrepugnancy—care should be taken to see whether the two do notreally operate in different fields qua different subject-matters.

51.5. Repugnancy must exist in fact and not depend upon a merepossibility.

51.6. Repugnancy may be direct in the sense that there isGinconsistency in the actual terms of the competing statutes andthere is, therefore, a direct conflict between two or more provisionsof the competing statutes. In this sense, the inconsistency mustbe clear and direct and be of such a nature as to bring the twoActs or parts thereof into direct collision with each other, reachinga situation where it is impossible to obey the one without disobeying H

the other. This happens when two enactments produce differentlegal results when applied to the same facts.

51.7. Though there may be no direct conflict, a State law may beinoperative because the Parliamentary law is intended to be acomplete, exhaustive or exclusive code. In such a case, the Statelaw is inconsistent and repugnant, even though obedience to bothlaws is possible, because so long as the State law is referable tothe same subject-matter as the Parliamentary law to any extent,it must give way. One test of seeing whether the subject-matterof the Parliamentary law is encroached upon is to find out whetherthe Parliamentary statute has adopted a plan or scheme whichwill be hindered and/or obstructed by giving effect to the Statelaw. It can then be said that the State law trenches upon theParliamentary statute. Negatively put, where Parliamentarylegislation does not purport to be exhaustive or unqualified, butitself permits or recognises other laws restricting or qualifying thegeneral provisions made in it, there can be said to be no repugnancy.

51.8. A conflict may arise when Parliamentary law and State lawseek to exercise their powers over the same subject-matter. Thisneed not be in the form of a direct conflict, where one says “do”and the other says “don’t”. Laws under this head are repugnanteven if the rule of conduct prescribed by both laws is identical.The test that has been applied in such cases is based on the principleon which the rule of implied repeal rests, namely, that if the subject-matter of the State legislation or part thereof is identical with thatof the Parliamentary legislation, so that they cannot both standtogether, then the State legislation will be said to be repugnant tothe Parliamentary legislation. However, if the State legislation orpart thereof deals not with the matters which formed the subject-matter of Parliamentary legislation but with other and distinctmatters though of a cognate and allied nature, there is norepugnancy.

51.9. Repugnant legislation by the State is void only to the extentof the repugnancy. In other words, only that portion of the State’sstatute 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 aState legislation is repugnant to Parliamentary legislation or anexisting law if the case falls within Article 254(2), and Presidential AB

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Aassent is received for State legislation, in which case Statelegislation prevails over Parliamentary legislation or an existinglaw within that State. Here again, the State law must give way toany subsequent Parliamentary law which adds to, amends, variesor repeals the law made by the Legislature of the State, by virtueof the operation of Article 254(2) proviso.”B

8.2 In Innoventive Industries Limited (supra), this Courtconsidered almost all earlier decisions starting from Zaverbhai Amaidasvs. State of Bombay[6]; 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 Courtheld that repugnancy under Article 254 would arise only if both theCParliamentary law and the State law are referable to List-III.

8.3 Once it is clear that the RBI Act is traceable only to theEntries in List-I and the State enactments are traceable only to an Entryin List-II, the question of repugnancy under Article 254 does not arise,as has been held in Innoventive Industries Limited. But in cases ofDthis nature, Article 246(1) would squarely apply. Article 246(1) reads asfollows:- “246.Subject-matter of laws made by Parliament and by theLegislatures of States: - E(1) Notwithstanding anything in clauses (2) and (3), Parliamenthas exclusive power to make laws with respect to any of thematters enumerated in List I in the Seventh Schedule (in thisConstitution referred to as the “Union List”).”

8.4 In UCO Bank and Another vs. Dipak Debbarma andOthers[8], a sale Notification issued under the Securitisation Act wasFchallenged on the ground that it constituted an infraction of Tripura LandRevenue and Land Reforms Act, 1960. This Court found that theSecuritisation Act is traceable to Entry-45 of List-I and the Tripura Actis traceable to Entries 18 and 45 of the State List. After referring to theConstitution Bench decision in State of West Bengal and Others vs.GCommittee for Protection of Democratic Rights, West Bengal andOthers[9] and other decisions, this Court held that the Securitisation Act, 6 AIR 1954 SC 7527 AIR 1956 SC 6768 (2017)2 SCC 585H9 (2010) 3 SCC 571

being a Parliamentary legislation is the dominant legislation. To come tothe said conclusion, this Court referred to the non-obstante clause inArticle 246(1).

8.5 Many times, this Court has invoked the doctrine of eclipse, inrelation to pre-constitutional laws with reference to Article 13(1) of theConstitution. But in later years, this doctrine came to be used even indifferent contexts. For instance in Kailash Sonkar vs. Smt. Maya Devi[10],this Court invoked the doctrine of eclipse to hold that when a person isconverted to Christianity or other religion, the original caste remainsunder eclipse and that as soon as during his life time he is reconverted tothe original religion, the eclipse disappears and the caste automaticallyrevives.

Is the argument of Conflict, a mirage?

9. It was argued on behalf of the State that without pointing outany area of conflict between the two enactments the NBFCs cannotinvoke either Article 246 or Article 254.

9.1 But the above argument has no substance. Once it is admittedthat the RBI Act is traceable to an entry in List-I, Article 246(1) comesinto play. In any case, there are also areas of conflict. The Kerala Act,for instance, empowers the debtor under Section 8(1) to deposit themoney due to money lender, into a Civil Court. Section 8(2) empowersthe Civil Court to pass orders recording full or part satisfaction of theloan.

9.2 But the jurisdiction of the Civil Court stands ousted by Section34 of the Securitisation Act, 2002. By virtue of a notification bearing No.S.O.856(E) dated 24[th] February, 2020, issued in exercise of the powersconferred by Section 2(1)(m)(iv), the Central Government have specifiedsuch NBFCs as defined in Section 45-I(f) of the RBI Act having assetsworth rupees one hundred crore and above to be entitled for enforcementof 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 securityinterest without the intervention of the Civil Courts and the remedy ofthe borrower lies only before the Debt Recovery Tribunal. This is onemajor area of conflict, which can be readily pointed out.

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A9.3 We have taken the above example only as a sample, for testingthe validity of the argument of the learned counsel for the State and wefind that the question of conflict does not go to the rescue of the State.

Overriding Effect

10. Section 45-Q which we have extracted elsewhere confersBoverriding effect upon Chapter III-B, over other laws. Therefore, theStates of Gujarat and Kerala cannot contend that the laws made bythem are in addition to the provisions of Chapter III-B.

10.1 Though it was contended by the learned counsel appearingfor the State of Gujarat that the Gujarat Act exempts NBFCs registeredCunder the RBI Act from seeking registration under the Gujarat Act, wedo 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 theRBI Act are deemed to have been registered under the Gujarat Act.Therefore, all other provisions of the Gujarat Act are sought to be appliedto NBFCs operating in the State of Gujarat. The other provisions of theDGujarat Act include the (i) power of search and seizure; (ii) requirementto maintain certain books and registers and to furnish statements; and(iii) the mandate not to dispose of any article taken from a debtor as apawn, pledge or security, before a period of two years from the datestipulated for final payment, etc. The Gujarat Act also empowers theECivil Court under Section 30 to reopen certain transactions and to limitthe interest recoverable. Section 32 of the Gujarat Act empowers theborrower to deposit the money before a Civil Court and the civil Court toassume jurisdiction of the adjudication of the dispute.

10.2 Interestingly, Gujarat Act, 2011 tacitly recognizes theFregulation of NBFCs under the RBI Act. Yet the State got the assent ofonly the Governor.

Conclusion

11. In view of the above, we are of the considered opinion thatthe Kerala Act and the Gujarat Act will have no application to NBFCsGregistered under the RBI Act and regulated by RBI. Therefore, all theappeals filed by NBFCs against the judgment of the Kerala High Courtare allowed. Likewise the appeals filed by the State of Gujarat againstthe judgment of the Gujarat high Court are dismissed.

11.1 As a consequence, Transfer Petition (Crl.) No.359 of 2015,Hshall also stand allowed and the First Information Report filed against the officer of the NBFC for violation of the provisions of the Kerala Actshall 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 hehas lodged a criminal complaint against the appellant and its officers inthe Civil Appeal, namely M/s. Muthoot Finance Private Limited, foralleged offences under the Indian Penal Code, but relying upon theprovisions of the Tamil Nadu Pawn Brokers Act and the rules framedthere under and that any decision rendered in the appeals arising out ofthe decisions of the Kerala and Gujarat High Courts may have an impacton his criminal complaint. Though we have not examined the provisionsof the Tamil Nadu Pawn Brokers Act and the Tamil Nadu MoneyLenders Act, the principles of law laid down herein, would apply equallyto these State enactments also. Therefore, the application for impleadmentnamely I.A. No.2 of 2015 is dismissed.

11.3 There will be no order as to costs.

Ankit Gyan(Assisted by : Tamana, LCRA)

Appeals disposed of.

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