Peerless General Finance And Investment Co. Limited & Anr. Vs. Reserve Bank of India
EmailSections 45J and 45K – Regulations of non-banking institutions in respect of matters connected with receipt of deposits from the public – RBI vested with very wide powers – Held that directions issued by RBI vide notification No. DFC.55/DG(O)-87 dt. 15.5.1987 were within its competence and in exercise of powers conferred under section 45K(3) – Prize Chits and Money Circulation Scheme (Banning) Act, 1978, section 2(e) – Constitution of India, Articles 19(1)(g).
It is not the concern of this court to find out as to whether actuarial method of accounting or any other method would be feasible or possible to adopt by the companies while carrying out the conditions contained in paragraphs 6 and 12 of the directions of 1987. The companies are free to adopt any mode of accounting permissible under the law but it is certain that they will have to follow the entire terms and conditions contained in the impugned directions of 1987 including those contained in paragraphs 6 and 12. It is not the function of the Court to amend and lay down some other directions and the High Court was totally wrong in doing so. The function of the Court is not to advise in matters relating to financial and economic policies for which bodies like Reserve Bank are fully competent. The Court can only strike down some or entire directions issued by the Reserve Bank in case the Court is satisfied that the directions were wholly unreasonable or violative of any provisions of the Constitution or any Statute. It would be hazardous and risky for the costs to tread an unknown path and should leave such task to the expert bodies. This court has repeatedly said that matters of economic policy ought to be left to the Government. (Para 36)
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We may also observe that the impugned directions of 1987 as well as any other directions issued from time to time by the Reserve Bank relating to economic or financial policy are never so sacrosanct that the same cannot be changed. Even the financial budget for every year depends on the economic and financial policy of the Government existing at the relevant time. So far as the impugned directions are concerned if it is found in future that the same are not workable or working against the public interest, the Reserve Bank is always free to change its policy and scrap or amend the directions as and when necessary. We have no doubt that if in times to come the Reserve Bank feels that business of the kind run at present by the Peerless and other companies, in terms of the directions of 1987 are not yielding the result as envisaged by the Reserve Bank, it will always be prepared to consider any new proposals which may be conducive both in the interest of the large multitude of the investors as well as the employees of such companies. (Para 41)
Per K. Ramaswamy, J. (Concurring)
No-one can have fundamental right to do any unregulated business with the subscribers/ depositors’ money. Even the banks or the financial companies are regulated by ceiling on public deposits fixing nexus between deposits and net-worth of the company at the ratio of 3 : 1, i.e. 25% of the capital net-worth. No-one would legitimately be expected to get immediate profits or dividend without capital investment. The concept of profit or interest pre-supposes capital investment. The effect of the clause (a) and (b) of the proviso to paragraph 6(1) of the direction, no doubt, freezes the right to profit for a short time, and fastens an incidental and consequential obligation to mop up paid up capital or investment towards establishment and commission charges to tide over teething trouble. But that is no ground to say that it is impossible of compliance, nor could it be said that the directions are palpably arbitrary or unreasonable. Anyone may venture to do business without any stake of his own but is subject to the regulations. A new company without any paid up capital, no doubt, cannot be expected to come into existence nor would operate its business at initial existence with profits. Clause (c) of the proviso to paragraph 6(1) of the directions gives freedom or leeway to invest or rotate, not more than 20 per cent of collections etc. in any profitable manner at its choice as a prudent businessman to generate its resources to tide over the teething troubles till it is put on rails to receive succour to its existence,without inhibiting the company’s capacity to mop up small savings, and the directions do not control its operation. The only rider is the approval of the Board of Directors which is inherent. Absence of imposition of any limit on quantum of deposits with reference to paid up capital or reserve fund like non-banking financial companies, etc. is a pointer in this regard. Thus there is a reasonable nexus between the regulation and the public purpose, namely, security to the depositors’ money and the right to repayment without any impediment, which undoubtedly is in the public interest.
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The directions impose only partial control in the public interest of the depositors. The deposits invested or keep invested qua the company always remained its fund till date of payment at maturity or premature withdrawal in terms of the contract. The effect of the impugned judgment of the Calcutta High Court namely redefinition of the aggregate liabilities as contractual liabilities due and payable would have the effect of requiring the R.N.B.Cs. to deposit an amount equal to the sum payable only in the year of maturity allowing free play to the R.N.B.Cs. to use the subscriptions/deposits in its own manner during the entire earlier period, jeopardise the security of the subscribers/depositors and are self-defeating. The sagging mismanagement prefaced hereinabove would be perpetrated and the depositor is always at the mercy of the company with all disabilities, killing the very goose namely the thrust to save for prosperous future or to tide over future needs.
It is well settled that the court is not a Tribunal from the crudities and inequities of complicated experimental economic legislation. The discretion in evolving an economic measures, rests with the policy makers and not with the judiciary. Indian social order is beset with social and economic inequalities and of status, and in our socialist secular democratic Republic, inequality is an anethema to social and economic justice. The constitution of India charges the state to reduce inequalities and ensure decent standard of life and economic equality. The Act assigns the power to the RBI to regulate monitory system and the experimentation of the economic legislation, can best be left to the executive unless it is found to be unrealistic or manifestly arbitrary. Even if a law is found wanting on trial, it is better that its defects should be demonstrated and removed than that the law should be aborted by judicial fiat. Such an assertion of judicial power deflects responsibilities from those on whom a democratic society ultimately rests. The court has to see whether the scheme, measure or regulation adopted is relevant or appropriate to the power exercised by the authority. Prejudice to the interest of depositors is a relevant factor. Mismanagement or inability to pay the accrued liabilities are evils sought to be remedied. The directions designed to preserve the right of the depositors and the ability of R.N.B.C. to pay back the contracted liability. It also intended to prevent mismanagement of the deposits collected from vulnerable social segments who have no knowledge of banking operations or credit system and repose unfounded blind faith on the company with fond hope of its ability to pay back the contracted amount. Thus the directions maintain the thrift for saving and streamline and strengthen the monetary operations of R.N.B.Cs.
It is settled law that so long as the power is traceable to the statute, mere omission to recite the provision does not denude the power of the legislature or rule making authority to make the regulations, nor considered without authority of law. Section 114 (h) of the Evidence Act draws a statutory presumption that official acts are regularly performed and reached satis-faction on consideration of relevant facts. The absence of reiteration of objectives satisfaction in the preamble as of one under s.45L does not denude the powers, the R.B.I. admittedly has under s.45L, to justify the actions. Though s.45L was neither expressly stated nor mentioned in the Preamble of the directions of the required recitation of satisfaction of objective facts to issue the directions from the facts and circumstances it is demonstrated that the R.B.I. had such satisfaction in its considerations of its power under s. 45L, when the directions were issued. Even otherwise s. 45 K (3) itself is sufficient to uphold the directions. The impugned directions are thus within the power of the R.B.I. to provide tardy, stable, identifiable and montiorable method of operations by each R.N.B.C. and its compliance of the directions. This will ensure security to the depositors at all times and also make the accounts of the company accurate, accountable and easy to monitor the working system of the company itself and continuance of its workmen. The directions in paragraphs 6 and 12 are just,fair and reasonable not only to the depositors, but in the long run to the very existence of the company and its continued business itself. Therefore, they are legal, valid and constitutionally permissible. (Paras 66, 69, 71 and 72)
2. U.P. State Sugar Corporation Ltd., and another v. Union of India & Others 1990 (3) SCC 223. (Para 37)
3. Reserve Bank of India etc. v. Peerless General Finance and Investment Co. Ltd. & Ors. etc. 1987 (2) SCR 1. (Para 44)
4. Reserve Bank of India v. Peerless General Finance and Investment Company Ltd. and Others, 1987 (1) SCC 424. (Para 1)
5. D.V.K. Prasada Rao v. Govt. of A.P. AIR 1984 A.P. 75. (Para 53)
6. Delhi Cloth and General Mills Etc. v. Union of India, Etc., 1983 (3) SCR 438. (Para 31)
7. R.K. Garg v. Union of India & Others, etc. etc. 1981 (4) SCC 675. (Para 37)
8. M/s. Prag Ice & Oil Mills and another v. Union of India and Nav Bharat Oil Mills and another v. Union of India 1978 (3) SCC 459. (Para 36)
9. Indian Aluminium Company etc. v. Kerala State Electricity Board, 1976 (1) SCR 70. (Para 14)
10. Shree Meenakshi Mills Ltd. v. Union of India AIR 1974 SC 366. (Para 32)
11. Premier Automobiles Ltd., and another v. Union of India AIR 1972 SC 1690. (Para 32)
12. Latafat Ali Khan & Ors. v. State of U.P. 1971 Supp. SCR 719. (Para 59)
13. Joseph Kuruvilla Vellukunnel v. Reserve Bank of India & Ors. 1962 Suppl. (3) SCR 632. (Para 52)
14. State of U.P. v. Babu Ram, 1961 (2) SCR 679. (Para 53)
15. Narendra Kumar v. Union of India, 1960 (2) SCR 375. (Para 67)
16. Hatisingh Mfg. Co. Ltd. & Anr. v. Union of India & Ors. 1960 (3) SCR 528. (Para 59)
17. Mohammad Yasin v. The Town Area Committee, Jalalabad and Another 1952 SCR 572. (Para 32)
1.Special Leave granted in all the petitions.
2.This litigation is an upshot of the earlier case Reserve Bank of India v. Peerless General Finance and Investment Company Ltd. and Others ((987) 1 S.C.C.,424) decided on January 22, 1987. In 1978 the Prize Chits and Money Circulation Scheme (Banning) Act, 1978 (in short ‘the Banning Act’) was enacted ‘to ban the promotion or conduct of prize chits or money circulation schemes and for matters connected therewith or incidental thereto.’ The question which arose in the above case was whether the Endowment Scheme piloted by the Peerless General Finance and Investment Company Ltd., (hereinafter in short ‘the Peerless’) fell within the definition of ‘Prize Chits’ within the meaning of Sec. 2(e) of the above Banning Act. By a letter dated July 23, 1979, the Reserve Bank of India pointed out to the Peerless that the schemes conducted by it were covered by the provisions of the Banning Act which had come into force w.e.f. December 12, 1978. On September 3, 1979 the Peerless filed a Writ Petition in the Calcutta High Court for a declaration that the Prize Chits Banning Act did not apply to the business carried on by the Peerless. A similar Writ Petition was filed questioning a notice issued by the Madhya Pradesh Government on the same lines as that issued by the West Bengal Government. A learned Single Judge of the High Court dismissed both the writ petitions but appeals preferred by the Peerless under the Letters Patent were allowed by a Division Bench of the Calcutta High Court. It was declared that the business carried on by the Peerless did not come within the mischief of the Prize Chits Banning Act. Against the judgment of the Division Bench of the Calcutta High Court, the Reserve Bank of India, the Union of India and the State of West Bengal preferred appeals before this Court. The question considered in the above case was “Is the endowment scheme of the Peerless Company a Prize Chit within the meaning of Section 2(e) of the Prize Chits and Money Circulation Schemes (Banning) Act?” This Court held that Section 2(e) does not contemplate a scheme without a prize and, therefore, the Endowment Certificate Scheme of the Peerless Company was outside the Prize Chits Banning Act. Appeals filed by the Reserve Bank of India, the Union of India and the State of West Bengal were accordingly dismissed. Chinnappa Reddy, J. observed :
“It is open to them to take such steps as are open to them in law to regulate schemes such as those run by the Peerless Company to prevent exploitation of ignorant subscribers. Care must also be taken to protect the thousands of employees. We must also record our dissatisfaction with some of the schemes of the Life Insurance Corporation which appear to us to be even less advantageous to the subscribers than the Peerless Scheme. We suggest that there should be a complete ban on forfeiture clauses in all savings schemes, including Life Insurance Policies, since these clauses hit hardest the classes of people who need security and protection most. We have explained this earlier and we do wonder whether the weaker sections of the people are not being made to pay the more affluent sections ! Robbing Peter to pay Paul? It was further observed “We would also like to query what action the Reserve Bank of India and the Union of India are taking or proposing to take against the mushroom growth of ‘finance and investment companies’ offering staggeringly high rates of interest to depositors leading us to suspect whether these companies are not speculative ventures floated to attract unwary and credulous investors and capture their savings. One has only to look at the morning’s newspaper to be greeted by advertisements inviting deposits and offering interest at astronomic rates. On January 1, 1987 one of the national newspapers published from Hyderabad, where one of us happened to be spending the vacation, carried as many as ten advertisements with ‘banner headlines’, covering the whole of the last page, a quarter of the first page and conspicuous spaces in other pages offering fabulous rates of interest. At least two of the advertisers offered to double the deposit in 30 months, 2000 for 1000, 10,000 for 5,000, they said. Another advertiser offered interest ranging between 30 per cent to 38 per cent for periods ranging between six months to five years. Almost all the advertisers offered extra interest ranging between 3 per cent to 6 per cent if deposits were made during the Christmas-Pongal season. Several of them offered gifts and prizes. If the Reserve Bank of India considers the Peerless Company with eight hundred crores invested in government securities, fixed deposits with National Banks etc. unsafe for depositors, one wonders what they have to say about the mushroom non-banking companies which are accepting deposits, promising most unlikely returns and what action is proposed to be taken to protect the investors. It does not require much imagination to realise the adventurous and precarious character of these businesses. Urgent action appears to be called for to protect the public. While on the one hand these schemes encourage two vices affecting public economy, the desire to make quick and easy money and the habit of excessive and wasteful consumer spending, on the other hand the investors who generally belong to the gullible and less affluent classes have no security whatsoever. Action appears imperative.”
3.Khalid, J., another learned Judge agreeing with the judgment of Chinnappa Reddy, J., further added his short but important concluding paragraph as under :
“I share my brother’s concern about the mushroom growth of financial companies all over the country. Such companies have proliferated. The victims of the schemes, that are attractively put forward in public media, are mostly middle class and lower middle class people. Instances are legion where such needy people have been reduced penniless because of the fraud played by such financial vultures. It is necessary for the authorities to evolve fool-proof schemes to see that fraud is not allowed to be played upon persons who are not conversant with the practice of such financial enterprises who pose themselves as benefactors of people. ”
4.Taking note of the weighty observations made by this Court, the Reserve Bank of India in exercise of the powers conferred by Section 45 (J) and 45 (K) of the Reserve Bank of India Act, 1934 (hereinafter referred to as the Act) and of all the powers enabling it in this behalf and considering it necessary in the public interest issued certain directions by notification No. DFC.55/DG(O)-87 dated the 15th May, 1987 (hereinafter referred to as the ‘directions of 1987’). The constitutional validity of these directions of 1987 was challenged by Timex Finance and Investment Company Ltd. (hereinafter referred to as ‘Timex Company’) by filing a writ petition in the Calcutta High Court before the learned Single Judge. The learned Single Judge granted an interim order in terms of prayers (g) and (h) of the writ petition. The Reserve Bank of India aggrieved against the interim order filed an appeal before the Division Bench. A stay petition was also moved on behalf of the Reserve Bank of India for staying the operation of the order dated 7th October, 1988 passed by the learned single Judge. After hearing the stay petition for sometime, the Division Bench of the High Court listed the appeal as well as the stay petition for final disposal. The Division Bench of the High Court disposed of the appeal as well as the writ petition by an order dated March 23, 1990, and arrived to the following findings and conclusions.
“(a) Reserve Bank of India is empowered to issue directions to the residuary non-banking companies under the provisions of Section 45J and 45K of the Reserve Bank of India Act, 1934 for the interest of thousands of depositors.
(b)However, to the extent such directions are found to be prohibitory or not workable and as such unreasonable must be held to be beyond the powers of the Reserve Bank of India.
(c)The impugned directions providing that they represent irreducible minimum for safeguarding the interest of and for preventing exploitation of small and unwary depositors cannot be implemented without suitable modification. It is not reasonably practicable to comply strictly with the directions as they stand by the writ petitioners and the similarly situated companies. The Supreme Court in Peerless case (Supra) reserved the liberty to the Reserve Bank of India to take such steps as are open to them in law to regulate the schemes such as those granted by the Peerless to prevent exploitation of subscribers and to protect thousands of employees. The impugned directions without modifications will run counter to the aforesaid directions of the Supreme Court.
(d)The business of savings and investments carried on by the company and similarly situated companies having not been declared unlawful or banned, power of the Reserve Bank of India to regulate such business cannot be permitted to be prohibitory resulting in the ultimate closure of the business carried on by the writ petitioner company and other similarly situated companies. If the modifications as suggested by us are not implemented and if ultimately the business is closed down and the company goes into liquidation, the hard earned money of thousands of depositors will be lost and the employees would also lose their job. If even after modifications are made to the impugned directions in terms of this order, any company fails to comply with such directions, the Government may take such steps as are open to them to protect the interests of the thousands of small depositors and numerous employees.
(e) The reasons why the impugned directions cannot be complied with and are held to be unworkable and unreasonable are mainly because of the definition of liability assigned in the impugned directions. The impugned directions, as they stand now, cannot be implemented by the residuary non-banking companies without incurring loss irrespective of their net worth. According to the impugned directions, the liability is the amount of money deposited by the depositors plus the amount of interest whether or not due to them according to the terms of the respective contracts at the given point of time. In other words, the entire collection with the interest, Bonus etc. whether payable or not would be the liability of the Company. This leaves no fund for working. If the definition of liability is amended as suggested by us, it will be possible for the companies to generate working capital.In our view, liability in clause 6 and in other clauses of the impugned directions should be construed to mean total amount of contractual dues of the depositors including interest, premium, bonus or other advantages by whatever name called, accrued on the amount according to the terms of contract. Section 45J and 45K of the Act do not authorise the Reserve Bank of India to introduce a concept of liability which is contrary to the accepted commercial practice and trading principles. The impugned directions have failed to make distinction between the actual liability in praesenti and a liability de futuro. Liberty must be reserved to the companies to adopt normal accountancy practice recognised and accepted in the trading circles so long as such accounting practice provides for payment of the liability to the depositors in accordance with the contractual obligations. However, the Reserve Bank of India may, having regard to the facts and circumstances of each case issue directions regulating the administrative and management expenses and expenditure on commission and publicity. In the impugned directions no restriction has been imposed on the expenditure by a residuary non-banking company on any of these heads.
In our view, the impugned directions without modifications, instead of suppressing the mischief, will only lead to adverse unworkable and/or impracticable results inasmuch as if the residuary non-banking companies cannot comply with such directions in toto, such companies have to go out of existence. This cannot be the object of the impugned directions. If the liability in terms of the contractual obligations is provided not only in the accounts but also by suitable investments in terms of Clause 6 of the directions, in our view, all the residuary non-banking companies, irrespective of their net worth, will be able to carry on the business.
(f)Every residuary non-banking company shall disclose its liability in its Books of Accounts and balance sheet the aggregate amount of liability accrued and payable to the depositors in accordance with the terms of the contract.
(g)The directions contained in clause 6 for deposit or investment and the liability shall be read subject to the modification of the definition of the liability as aforesaid.
(h) The directions are prospective. The period of deposit and the date of return with respect to all certificates issued prior to 15th May 1987 have been excluded from the purview of the directions as per clause 18(1). This exemption should include all contractual obligations on those certificates.
(i) All funds prior to the issue of the directions should be allowed to be kept in the manner as was being done by the respective residuary non-banking company. The direction with regard to the investment shall be applicable from the moneys collected and/or received on and after 15th May 1987. The companies shall be allowed reasonable time to make good the deficiency in the investment required to be made in terms of the directions after 15th May 1987.
(j) We are not unmindful of the fact that exercise of power by legislature and executive is subject to judicial restraint. The only check on judicial exercise of power is the self- imposed discipline of judicial restraint. But although the courts in exercise of judicial power are not competent to direct the enactment of a particular provision of law, if the statutory directions suffer from arbitrariness, the court is competent to issue necessary directions so that the statutory directions may be brought in conformity with law. As we have held that the Reserve Bank of India has transgressed the statutory power to the extent indicated elsewhere in the judgment, we are of the view that the Reserve Bank of India shall modify the directions and make them reasonable and workable to safeguard the interest of depositors and protect the employees”.
5.The Division Bench also considered an application filed by Favourite Small Investment Company and by order dated 20th December, 1990 directed that the Reserve Bank of India should revoke the prohibitory order and permit Favourite Small Investment Company to accept fresh deposits and carry on new business.
6.It may be noted that the Peerless filed a petition before the High Court for becoming a party-respondent. The High Court by order dated 31st August, 1990 allowed the said application and further ordered that the cause title and the records proceedings of appeal, memorandum of appeal and the paper book filed be amended accordingly. The Peerless also moved an application for clarification of the judgment and order dated 23rd March, 1990. It prayed that suitable provision should be made for a depositor who wants back the money before maturity. If the depositor intends to get refund of the money invested before the expiry of actual contract period, he should be required to keep the funds for a minimum period in accordance with the contract. Before maturity he can only take loan but not the principal amount with interest. The amounts of returns should also be less than 5 per cent to provide for the collection and other expenses of the non-banking companies. The Division Bench of the High Court took the view that the order dated 23rd March, 1990 required clarification as it was not made clear as to whether non residuary banking companies are under an obligation to pay discontinued certificates before the stipulated period in the contract, if so what would be the rate of interest. The Division Bench by order dated December 24, 1990 clarified its earlier order dated 23 March, 1990 as under :
“(a) If the contract by and between the company and the depositor provides that no payment on discontinued certificate will be made before the expiry of the term stipulated in the contract, in such cases, if the certificate is discontinued any time before such stipulated term and payment is made to the depositors according to the terms and conditions of the contract, in other words, on the expiry of the term stipulated in the contract, such depositor shall be paid interest at the rate of 8% compound per annum, but in such a case the company will be at liberty to deduct an amount not exceeding 5% from the total return in or to provide for collection and other expenses incurred in connection with these discontinued certificates.
(b) In cases where certificates are discontinued before or after the stipulated term but the depositors obtain refund only upon maturity of the certificates, such refund shall be made to the depositors with compound interest at the rate of 8% per annum without any deduction whatsoever.
(c) Since no payment will be made against the discontinued certificates to the depositors in such cases shall be permitted to take loan, if they so intend, against the payment made till discontinuance of such terms and conditions as the company may stipulate”.
7.The Reserve Bank of India aggrieved against all the above orders of the Calcutta High Court has filed appeals against the orders dated 23rd March, 1990, 31st August, 1990, 20th December, 1990 and 24th December, 1990. The Peerless General Finance and Investment Company Ltd., has also filed a writ petition No. 677 of 1991 directly before this Court under Article 32 of the Constitution of India.
8.In view of the fact that the questions raised in the appeals filed by the Reserve Bank of India against the orders of the High Court and in the civil writ petition filed by the Peerless Company are common, the same were heard together and are disposed of by a single order. Interlocutory applications were also filed on behalf of the employees of the Peerless Company, agents of Peerless Company working in the field, and some of the depositors in the Peerless company. We have heard them also.
9.The main controversy centres round paragraphs (6) and (12) of the directions of 1987 and as such the same are reproduced in full.
Paragraph (6)Security for depositors
On and from 15th May 1987-
(1)Every residuary non-banking company shall deposit and keep deposited in fixed deposits with public sector banks or invest and keep invested in unencumbered approved securities (such securities being valued at their marked value for the time being), or in other investments, which in the opinion of the company are safe, a sum which shall not, at the close of business on 31st December 1987 and thereafter at the end of each half year that is, 30th June and 31st December be less than the aggregate amounts of the liabilities to the depositors whether or not such amounts have become payable:
Provided that of the sum so deposited or invested
(a)not less than 10 percent shall be in fixed deposits with any of the public sector banks;
(b) not less than 70 per cent shall be in approved securities;
(c) not more than 20 per cent or ten times the net owned funds of the company, whichever amount is less, shall be in other investments, provided that such investments shall be with the approval of the Board of Directors of the Company.
Explanation :
“Net owned funds” shall mean the aggregate of the paid-up capital and free reserves as appearing in the latest audited balance sheet of the company as reduced by the amount of accumulated balance of loss, deferred revenue expenditure and other intangible assets, if any, as disclosed in the said balance sheet.
(2)Every residuary non-banking company shall entrust to one of the public sector banks designated in that behalf, deposits and securities referred to in clauses (a) and (b) of the proviso to sub paragraph (1) to be held by such designated bank for the benefit of the depositors. Such securities and deposits shall not be withdrawn by the residuary non-banking company, or otherwise dealt with, except for repayment to the depositors.
(3) Every residuary non-banking company shall furnish to the Reserve Bank within thirty days from the close of business on 31st December 1987 and thereafter at the end of each half year that is as on 30th June and 31st December, a certificate from its auditors, being members of Institute of Chartered Accountants, to the effect that the amounts deposited in fixed deposits and the investments made are not less than the aggregate amounts of liabilities to the depositors as on 30th June and 31st December of that year.
Explanation :
For the purpose of this paragraph,
(a) “Aggregate amounts of liabilities” shall mean total amount of deposits received together with interest, premium, bonus or other advantage by whatever name called accrued on the amount of deposits according to the terms of contract.
(b) “approved securities” means, the securities in which the Trustee is authorised to invest trust money by any law for the time being in force in India and bonds or fixed deposits issued by any Corporation established or constituted under any Central or State enactments.
(c)”public sector banks” means, the State Bank of India, the Subsidiary Banks and the corresponding new banks referred to in Section 45(1) of the Reserve Bank of India Act, 1934 (2 of 1934).
(d)”unencumbered approved securities” shall include the approved securities lodged by the company with another institution for advance or any other credit arrangements to the extent to which such securities have not been drawn against or availed of.
Paragraph (12) Every residuary non-banking company shall disclose as liabilities in its books of accounts and balance sheets the total amount of deposits received together with interest, bonus, premium or other advantage, accrued or payable to the depositors.
10. We would first deal with the legal objections raised on behalf of the Peerless and other companies. It has been submitted on behalf of the Peerless and other companies that the directions of 1987 are ultra vires of Sections 45J and 45K of the Reserve Bank of India Act, 1934. None of the said sections authorises the Reserve Bank to frame any directions prescribing the manner of investment of deposits received or the method of accountancy to be followed or the manner in which its balance-sheet and books of accounts are to be drawn up. It has been contended that Section 45J has no manner of application in the present case. Section 45K (3) of the Act on which reliance has been placed on behalf of the Reserve Bank, merely provides that the Reserve Bank may, if it considers necessary in the public interest so to do, give directions to non-banking institutions either generally or to any non-banking institutions in particular, in respect of any matters relating to or connected with receipts of deposits, including the rate of interest payable on such deposits and the purpose for which deposits will be received. According to Sec.45K (4) if any non-banking institution fails to comply with any direction given by the bank under sub-s.(3) the Reserve Bank may prohibit the acceptance of deposits by that non-banking institution. It is thus submitted that on a plain reading of Sec.45K(3) the Reserve Bank is only competent to frame the directions regarding receipt of deposits and such power of direction does not extend to providing the manner in which deposits can be invested or the manner in which the liabilities are to be disclosed in the balance-sheet or books of accounts of the company. It is further submitted that the power under Sub-s.(4) is to prohibit acceptance of deposits and as such the permissible field of direction making is limited to receipt of deposits and nothing more. The Reserve Bank of India in framing the directions of 1987 which is a subordinate piece of legislation has clearly over-stepped the bounds of the parent statute of Sec.45K (3) of the Act.
11. It is further argued that the Reserve Bank cannot contend that paragraphs 6 and 12 of the directions of 1987 are covered within the powers conferred on the Reserve Bank under Sec.45L (1)(b) of the Act. It is submitted that the Reserve Bank had at no point of time expressed its intention to invoke its powers under Sec.45L. Even before the Division Bench of the Calcutta High Court the Reserve Bank did not rely on Sec.45L as alleged source of its power to issue the impugned directions nor the Reserve Bank referred to Sec.45L in its pleadings before the High Court. Wherever the Reserve Bank of India wanted to invoke its power under Sec.45L of the Act, it has expressly mentioned that it was exercising its powers under Sec.45L. In the case of non-banking financial companies (Reserve Bank) directions 1977, or the miscellaneous non-banking companies (Reserve Bank) Directions, 1977 it has expressly said that it was invoking its powers under Sec.45L of the Act, whereas in the case of the impugned directions, the Reserve Bank has only referred to Sections 45J and 45K of the Act. The Reserve Bank of India itself in the affidavit filed before the High Court had stated that the directions of 1987 were framed after careful deliberations at the highest level and now it cannot take the stand that the source of its power in framing the impugned directions was exercised under sec.45L of the Act. It is further contended that in order to invoke the powers under Sec.45L of the Act it has to state that the Reserve Bank was satisfied for the purpose of enabling it to regulate the credit system of the country to its advantage and it was necessary to give such institutions directions relating to the conduct of business by financial institution or institutions. In order to exercise its powers under Sec.45L of the Act, it has to apply its mind for the purpose of arriving at the statutorily required satisfaction. In fact, such recital is necessary since such satisfaction is a pre-condition for the Reserve Bank to exercise its powers under Section 45L of the Act.
12. On the other hand it has been contended on behalf of the Reserve Bank that the power of the Reserve Bank to regulate deposit acceptance activities of non-banking and financial institutions under Chapter IIIB of the Act cannot be disputed. The Reserve Bank has power to issue the impugned directions under Sections 45J, 45K and 45L of the Act. The pith and substance of Para 6 of the directions of 1987 is to ensure that deposits received from the public are invested in a manner to secure the repayment of the deposits. A deposit is, by definition, a sum of money received with a corresponding obligation to repay the same. Thus, the repayment of the deposit is an integral part of the transaction of a receipt of deposit. It is contended that the expression “receipt of deposit” must be construed liberally, in the light of the nature of the provisions as well as in the light of the wide language used in the provision. It is also argued that even if the impugned directions of 1987 are not covered under the powers conferred under Sections 45J and 45K of the Act, those are squarely covered by Section 45L of the Act. It is submitted that various provisions under the Act are enabling in nature and confer overlapping powers. Even if there is no recital of Sec.45L, it would not be of much consequence, if such exercise of power can be related to Sec.45L of the Act.
13. We have considered the arguments advanced by learned counsel for the parties. Chapter IIIB laying down provisions relating to non-banking institutions receiving deposits and financial institutions was inserted in the Reserve Bank of India Act, 1934, by virtue of Act 55 of 1963 w.e.f. 1.2.1964. Sections 45J, 45K (3) & (4) and 45L 1(b) relevant for our purpose are given as under:
Sec. 45J.
“The Bank may, if it considers necessary in the public interest so to do, by general or special order, –
(a) regulate or prohibit the issue by any non-banking institution of any prospectus or advertisement soliciting deposits of money from the public; and
(b) specify the conditions subject to which any such prospectus or advertisement, if not prohibited, may be issued.
Section 45K
(1) ……………..
(2) ………………
(3) The Bank may, if it considers necessary in the public interest so to do, give directions to non-banking institutions either generally or to any non-banking institution or group of non-banking 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 non-banking institution fails to comply with any direction given by the Bank under sub-section (3), the Bank may prohibit the acceptance of deposits by that non-banking institution.
Section 45L(1) If the bank is satisfied that for the purpose of enabling it to regulate the credit system of the country to its advantage it is necessary so to do; it may –
(a)……………………………
(b) give to such institutions either generally or to any such institution in particular, directions relating to the conduct of business by them or by it as financial institutions or institution.
14. A combined reading of the above provisions unmistakably goes to show that the Reserve Bank if considers necessary in the public interest so to do can specify the conditions subject to which any prospectus or advertisement soliciting deposits of money from the public may be issued. It can also give directions to non-banking institutions 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. This latter power flows from sub-s.(3) of Sec.45K of the Act. The Bank under this provision can give directions in respect of any matters relating to or connected with the receipt of deposits (emphasis added). In our view a very wide power is given to the Reserve Bank of India to issue directions in respect of any matters relating to or connected with the receipt of deposits. It cannot be considered as a power restricted or limited to receipt of deposits as sought to be argued on behalf of the companies that under this power the Reserve Bank would only be competent to stipulate that deposits cannot be received beyond a certain limit or that the receipt of deposits may be linked with the capital of the company. Such interpretation would be violating the language of Sec.45K (3) which furnishes a wide power to the Reserve Bank to give any directions in respect of any matters relating to or connected with the receipt of deposits. The Reserve Bank under this provision is entitled to give directions with regard to the manner in which the deposits are to be invested and also the manner in which such deposits are to be disclosed in the balance-sheet or books of accounts of the company. The word ‘any’ qualifying matters relating to or connected with the receipt of deposits in the above provision is of great significance and in our view the impugned directions of 1987 are fully covered under Sec.45K (3) of the Act, which gives power to the Reserve Bank to issue such directions. As a proposition of law we agree with the contention of the Learned counsel for the Reserve Bank that when an authority takes action which is within its competence, it cannot be held to be invalid merely because it purports to be made under a wrong provision, if it can be shown to be within its power under any other provision. Learned counsel in this regard has placed reliance on Indian Aluminium Company etc. v. Kerala State Electricity Board (1976) 1 S.C.R. 70.
15. In our view, as already held above, the Reserve Bank was competent and authorised to issue the impugned directions of 1987, in exercise of powers conferred under Section 45K (3) of the Act.
16.Having cleared the ground of ultra vires, we must now turn to the main challenge posed on behalf of the Peerless and other companies and employees.
