T. Velayudhan Achari & Anr. Vs. Union of India & Ors.
EmailAppeal: Writ Petition (Civil) No.508 of 1988
(With WP(C) Nos.534/88, CA No.5513/85, 5679/85, 5686/85 183/86, 192, 235-36/86, 363/86, 447/86, 510-15/86, 529/86, 646/86, 647/86, 1199/86, 1200/86, 1250/86, WP (C) Nos.143, 269, 434/86, T.P. (C) Nos.76,77,78-80/86, 88/86, 139-49/86, 154/86, 155/86, C.A.Nos.81-83/86, T.C. (C) No.81/86, I.A.Nos. 1 & 2/92 in CA No.5513/85)
With
C.A.No. 174/86 Manipal Finance Corp. v. U.O.I. & Anr.
(With C.A.Nos.193/86,624/86,509/86,W.P.(C) 1506/87, C.A.Nos.696-99/86,949-50/86,541/86,W.P.(C) 602/89)
(With WP(C) Nos.534/88, CA No.5513/85, 5679/85, 5686/85 183/86, 192, 235-36/86, 363/86, 447/86, 510-15/86, 529/86, 646/86, 647/86, 1199/86, 1200/86, 1250/86, WP (C) Nos.143, 269, 434/86, T.P. (C) Nos.76,77,78-80/86, 88/86, 139-49/86, 154/86, 155/86, C.A.Nos.81-83/86, T.C. (C) No.81/86, I.A.Nos. 1 & 2/92 in CA No.5513/85)
With
C.A.No. 174/86 Manipal Finance Corp. v. U.O.I. & Anr.
(With C.A.Nos.193/86,624/86,509/86,W.P.(C) 1506/87, C.A.Nos.696-99/86,949-50/86,541/86,W.P.(C) 602/89)
Petitioner: T. Velayudhan Achari & Anr.
Respondent: Union of India & Ors.
Apeal: Writ Petition (Civil) No.508 of 1988
(With WP(C) Nos.534/88, CA No.5513/85, 5679/85, 5686/85 183/86, 192, 235-36/86, 363/86, 447/86, 510-15/86, 529/86, 646/86, 647/86, 1199/86, 1200/86, 1250/86, WP (C) Nos.143, 269, 434/86, T.P. (C) Nos.76,77,78-80/86, 88/86, 139-49/86, 154/86, 155/86, C.A.Nos.81-83/86, T.C. (C) No.81/86, I.A.Nos. 1 & 2/92 in CA No.5513/85)
With
C.A.No. 174/86 Manipal Finance Corp. v. U.O.I. & Anr.
(With C.A.Nos.193/86,624/86,509/86,W.P.(C) 1506/87, C.A.Nos.696-99/86,949-50/86,541/86,W.P.(C) 602/89)
(With WP(C) Nos.534/88, CA No.5513/85, 5679/85, 5686/85 183/86, 192, 235-36/86, 363/86, 447/86, 510-15/86, 529/86, 646/86, 647/86, 1199/86, 1200/86, 1250/86, WP (C) Nos.143, 269, 434/86, T.P. (C) Nos.76,77,78-80/86, 88/86, 139-49/86, 154/86, 155/86, C.A.Nos.81-83/86, T.C. (C) No.81/86, I.A.Nos. 1 & 2/92 in CA No.5513/85)
With
C.A.No. 174/86 Manipal Finance Corp. v. U.O.I. & Anr.
(With C.A.Nos.193/86,624/86,509/86,W.P.(C) 1506/87, C.A.Nos.696-99/86,949-50/86,541/86,W.P.(C) 602/89)
Judges: LALIT MOHAN SHARMA, CJI., S.MOHAN & N. VENKATACHALA, JJ.
Date of Judgment: Feb 05, 1993
Head Note:
BANKING LAW
Reserve Bank of India Act, 1934:
Section 58B(5A) read with section 45S – Constitutional validity of Chapter III read with section 58B(5A) – Acceptance of depos its from the public – Restrictions on the number of depositors – Economic legislation – Decision of executive is unconstitu tional only if it is arbitrary, discriminatory or demonstrably irrelevant – – Kerala Money Lenders Act, 1958, section 4(2)(iii) – Constitutional validity of section 58B(5A) up
Held:
Banking Laws (Amendment) Act, 1983 (Act 1 of 1984) – Consti tution of India, Articles 14 and 19(1)(g) – Cr.P.C., section 125(3).
(Kanta Mehta v. Union of India & Others, 1987 Company Cases Vol. 2, p. 769 – Approved..)
(Kanta Mehta v. Union of India & Others, 1987 Company Cases Vol. 2, p. 769 – Approved..)
Reserve Bank of India Act, 1934:
Sections 42 and 45(I)(bb) – Acceptance of deposits – Prescription of two years’ period – Whether unreasonable? – Held no – Constitution of India, Article 19(1)(g). (Paras 40 to 43)
Reserve Bank of India Act, 1934:
Section 58B(5A) – Punishment for violation of provisions of section 45S – Whether it is violative of Article 20(1)? – Held no. (Para 44)
Held –
Cases Reffered:
1. Peerless General Finance and Investment Co. Ltd. v. Reserve Bank of India. JT 1992 (1) SC 405 = 1992 (2) SCC 343 Relied. (Para 29)
2. Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd., JT 1987 (1) SC 246 = 1987 (1) SCC 424 Relied. (Para 28)
3. Kanta Mehta v. Union of India & Others, 1987 Company Cases Vol. 2, p. 769 – Approved.. (Paras 1 and 37)
4. DCM Ltd. v. U.O.I., 1983 (3) SCR 438. (Paras 10 & 44)
5. State of West Bengal v. Swapan Kumar Guha., 1982 (3) SCR 121. (Para 14)
6. R.K. Garg v. Union of India., 1982 (1) SCR 947. (Para 24)
7. Srinivasa Enterprises v. Union of India., 1981 (1) SCR 801. (Para 12)
8. Fatehchand Himmatlal and others v. State of Maharashtra., 1977 (2) SCR 828. (Para 25)
9. Oudh Sugar Mills Ltd. v. Union of India., AIR 1970 SC 1070. (Para 21)
10. Chinoy Bottling Co. Pvt. Ltd. v. Asst. Registrar of Companies, Madras, 61 Company Cases 1986 – Overruled. (Paras 21 and 45.)
2. Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd., JT 1987 (1) SC 246 = 1987 (1) SCC 424 Relied. (Para 28)
3. Kanta Mehta v. Union of India & Others, 1987 Company Cases Vol. 2, p. 769 – Approved.. (Paras 1 and 37)
4. DCM Ltd. v. U.O.I., 1983 (3) SCR 438. (Paras 10 & 44)
5. State of West Bengal v. Swapan Kumar Guha., 1982 (3) SCR 121. (Para 14)
6. R.K. Garg v. Union of India., 1982 (1) SCR 947. (Para 24)
7. Srinivasa Enterprises v. Union of India., 1981 (1) SCR 801. (Para 12)
8. Fatehchand Himmatlal and others v. State of Maharashtra., 1977 (2) SCR 828. (Para 25)
9. Oudh Sugar Mills Ltd. v. Union of India., AIR 1970 SC 1070. (Para 21)
10. Chinoy Bottling Co. Pvt. Ltd. v. Asst. Registrar of Companies, Madras, 61 Company Cases 1986 – Overruled. (Paras 21 and 45.)
JUDGEMENT:
MOHAN, J. :
1. All these civil appeals arise by certificate granted by the High Court of Delhi against the decision reported in Kanta Mehta v. Union of India and others ( Company Cases Vol. 62 1987 Page 769 ).
2. All these civil appeals and writ petitions challenge the constitutional validity of Chapter III-C read with section 58B (5A) of the Reserve Bank of India Act, 1934, introduced by the Banking Laws (Amendment) Act, 1983 (Act 1 of 1984). Hence, they are dealt with under a common judgment.
3. In order to appreciate the challenge the necessary legal background may be set out.
4. In the year 1949, the Banking Regulation Act of 1949 was enacted. That contained regulatory provisions in regard to banking under the surveillance of the Reserve Bank of India as to what would constitute “banking” as defined under Section 5(b) of the 1949 Act.
5. In the year 1959, the Banking Companies (Amendment)Act, 1959 was passed. Sections 17 and 18 were substituted which required banking companies to create reserve fund and maintain cash reserve. In the year 1963, Banking Laws (Miscellaneous Provisions) Act, 1963 inserted Chapter III-B in the Reserve Bank of India Act. This Chapter conferred extensive powers on the Reserve Bank of India to issue suitable instructions, to regulate and monitor diverse activities of non-banking companies. The powers to control and regulate these non-banking institutions are set out in Sections 45-I to 45-L. While exercising these powers, the Reserve Bank of India was issuing various directions to these non-banking financial institutions. One such important direction was issued on 1st of January, 1967 to the effect that the non-banking financial companies were not to hold deposits in excess of 25 per cent of its paid-up capital and the reserves as also to non-banking, non-financial companies. They were also required to take steps to keep the deposits within the limits. This direction was challenged unsuccessfully before the Madras High Court as seen from the case reported in 1971 41 Company Cases 890 (Mayavaram Financial Corporation vs. Reserve Bank of India).
6. In 1968, by Banking Laws (Amendment) Act, 1968, Sections 10A to 10D were introduced. Section 10A provided that the Board of Directors shall include persons with professional or special knowledge. Section 10A(5) empowered the Reserve Bank of India to vary the composition of the Board.
7. When a report of the Study Group of non-banking financial intermediaries was submitted in the year 1971 that was studied. Thereafter in 1973 the Reserve Bank of India issued Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1973 placing certain restrictions on companies carrying on prize chit and chit business from receiving deposits from the public.
8. In 1974, Section 58A of the Companies Act was inserted by the Companies (Amendment) Act of 1974, which came into force from 1st of February, 1975. The object was to regulate deposits received by non-banking non-financial companies. The financial companies were already covered by Reserve Bank of India directions under the Reserve Bank of India Act. Therefore, they were exempted under Section 58A (7) from the purview of that Section. Since the non-banking non-financial companies came within the purview of Section 58A, the earlier directions issued by the Reserve Bank of India Act to non-banking non-financial companies in the year 1966 were withdrawn. By an amendment of 1977, Section 58A was further enlarged and the Central Government was empowered to grant extensions.
9. In June 1974, another Study Group was constituted which is popularly known as James Raj Committee.
10. In July 1975, the above Study Group gave its report. In accordance with the recommendations of the Study Group elaborate rules were issued by the Central Government under Section 58A, called Banking Companies (Acceptance of Deposits) Rules, 1975 with a view to regulate the various activities of the companies to accept deposits from public. The validity of the section and the deposit rules were questioned. This Court in DCM Ltd. v. U.O.I. (1983 (3) SCR 438) upheld the same.
11. In 1977, directions were issued by the Reserve Bank of India superseding earlier directions of 1966 and 1973.
12. In 1978, Bill 183 of 1978 called Banking Laws (Amendment) Bill, 1978 was introduced in the Parliament. The said Bill provided limits on depositors which were lower than the current provisions. However, the Bill lapsed on dissolution of Parliament. Thereafter prize chits and Money Circulation Schemes (Banning) Act, 1978 was enacted. This was also challenged. But that challenge was thrown out by this Court in Srinivasa Enterprises v. Union of India ( 1981 (1) SCR 801 ).
13. In 1981, several new regulatory directions were given by the Reserve Bank of India. Inter alia they included restrictions on accepting or renewing deposits from shareholders, Directors etc. which exceeded 15 per cent of the net-owned funds of the companies as also restricted payment of interest on deposits at a rate of interest exceeding 15 per cent per annum. The validity of the amendments was upheld by the Madras High court in the case reported in AIR 1983 Madras 330 (A.S.P. Ayar vs. Reserve Bank of India).
14. In State of West Bengal v. Swapan Kumar Guha known as Sanchaita case, reported in 1982 (3) SCR 121, this Court while quashing the F.I.R. launched against the firm, Sanchaita Investments, directed that the Government and Reserve Bank of India should look into the matter deeply. It is in this background the Banking Laws (Amendment) Act, 1983 came to be enacted. Section 45S states thus:
Deposits not to be accepted in certain cases.
“45S. (1) No person, being an individual or a firm or an unincorporated association of individuals, shall, at any time, have deposits from more than the number of depositors specified against each, in the table below:-
TABLE
(i) Individual – Not more than ten depositors.
(ii) Firm – Not more than ten depositors per
partner and not more than forty
depositors in all.
(iii) Association – Not more than ten of individuals
depositors per individual and not
more than forty depositors in all.
(2) Where at the commencement of the Banking Laws (Amendment) Act, 1978 the deposits held by any such person are not in accordance with sub-section (1), he shall repay such of the deposits as shall fall due for repayment immediately after the commencement of that Act so as to bring the number of depositors within the relative limit specified in that sub- section.
Explanation – Where a deposit has been made by two or more persons, it shall, for the purposes of this section, be deemed to have been made by as many depositors as there are number of persons making such deposit.”
15. Thus, the number of depositors has come to be limited.
16. As to the penalty for contravention of Section 45S it is provided for under Section 58B (5A). It runs thus:
“(5A). If any person contravenes any provision of Section 45S, he shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of deposit received by such person in contravention of that section or rupees two thousand, whichever is more, or with both.”
17. These provisions were challenged by the appellants in the various civil appeals as violative of Articles 14 and 19 of the Constitution. A Division Bench of the High Court of Delhi in Kanta Mehta’s case (supra) held:
“Section 45S read with section 58B (5A) of chapter III-C of the Reserve Bank of India Act, 1934, as introduced by section 10 of the Banking Laws (Amendment) Act, 1983, is not violative of articles 14 and 19 of the Constitution. There is nothing demonstrably irrelevant or perverse in limiting in section 45S the number of depositors that an individual, firm or association could accept.
Nor is there any element of compulsion on individuals and firms or associations which are not incorporated to incorporate themselves as a company and article 19(1)(c) is not violated by the provisions of section 45S limiting the number of depositors whom individuals, firms and unincorporated associations could accept.
Chapter III-C of the Reserve Bank of India Act, 1934, imposes reasonable restrictions on the right of individuals, firms and unincorporated associations to carry on the business of acceptance of deposits and advancing or giving loans to the public. There is also a further safeguard that Chapter III-C is being operated under the supervision and control of the Reserve Bank of India.
The business of acceptance of deposits from the public does not fall within entry 30 or entry 32 of List II of Schedule VII of the Constitution. It falls within entry 45 or in any case under entry 97 of List I of Schedule VII under which only Parliament has power to pass the impugned legislation. Parliament had full competence and power to pass Chapter III-C of the Reserve Bank of India Act, 1934.”
18. Mr. G. Viswanatha Iyer, learned counsel for the writ petitioners in WP.Nos. 508 and 534 of 1988 submits that Section 45B is violative of the fundamental right under Article 19(1)(g) of the Constitution as it restricts the number of depositors and the rate of interest under Section 4(2)(iii) of the Kerala Money-Lenders Act, 1958 (hereinafter referred to as the Kerala Act).
19. The two years’ period prescribed under Section 42 is unreasonable.
20. Under Kerala Act, with effect from 15.10.85 only 14 per cent interest alone could be charged.
21. In any event, while receiving deposits it was not an offence, making it a criminal liability and directing payment, would amount to ex post facto law, offending Article 20(1) of the Constitution. In support of this submission, reliance is placed on Chinoy Bottling Co. Pvt. Ltd. v. Assistant Registrar of Companies, Madras 61 Company Cases 1986 page 770 and Oudh Sugar Mills Ltd. v. Union of India ( AIR 1970 SC 1070).
22. The other learned counsel seriously pressed the point relating to criminal liability and prayed for time to comply with the provisions of Section 45S.
23. Mr. Anil B. Diwan, learned counsel appearing for Respondent 2 in C.A. No.447 of 1986, after referring us to the development of law, would submit that it is open to the Government to regulate the economic activities. While examining the validity of such provisions the courts always have regard to the wisdom of the Legislature because that alone has the necessary information and expertise pointing to the need of such a legislation.
24. In R.K. Garg v. Union of India 1982 (1) SCR 947 at 969-70 this aspect of the matter was highlighted.
25. It was in this view, this Court upheld Maharashtra Debt Relief Act, 1976 in Fatehchand Himmatlal and others v. State of Maharashtra (1977 (2) SCR 828). If properly analysed, it can be seen that these provisions constitute a regulatory scheme and not a penal liability.
26. Much is made of the penal provisions under Section 58B (5A). It is submitted that imprisonment of a recalcitrant debtor is permissible in law. If one goes by the facts of these cases even after 1986, they collect deposits when law required them not to do so.
27. Under Section 45(I)(bb) deposit has been defined. If as per the definition there are enough sources of deposit there is no reason why the appellants cannot reduce the deposits. If, therefore, the package is reasonable there is no justification to dilute the effect of Section 58B (5A). While examining the scope of the Section it might be contrasted with Section 125 (3) of the Criminal Procedure Code wherein a sufficient cause is provided.
28. In Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. 1 ( 1987 (1) SCC 424 ) this Court had occasion to consider the adventures indulged by the persons like appellants. It criticised the fraud played by such financial vultures.
29. This approach was approved in Peerless General Finance and Investment Co. Ltd. v. Reserve Bank of India2
30. The learned counsel also draws our attention to the Non-banking Financial Companies (Reserve Bank) Directions of 1966. They came into force on January 1, 1967. Clause 4 sub-clause (3) specifically provides that the deposit shall be reduced to 25 per cent of the paid-up capital for which two-year period was provided. Similar directions of 1977 known as Non-Banking Financial Companies (Reserve Bank) Directions, 1977 came to be issued with effect from 1st of July, 1977.
31. There were complaints, even then, that the financial companies were not paying interest regularly and the Reserve Bank was requested to help the depositor. Therefore, in the teeth of this provision, to say that suddenly the appellants and the writ petitioners are called upon to reduce, would work hardship and they should not be penalised, is incorrect. They took a calculated risk and, therefore, they had to suffer for their own fault.
32. In examining the various submissions addressed on behalf of the appellants and the petitioners we propose to examine the same in the following background since it is a law relating to regulation of economic activities.
33. In R.K. Garg’s case (supra) it is held at pages 969-70:
“Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc.
It has been said by no less a person than Holmes, J. that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or straight jacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The greater play in the joints has to be allowed to the legislature. The court should feel more inclined to give judicial deference to legislature judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Dond (354 US 457) where Frankfurter, J. said in his inimitable style:
“In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events – self – limitation can be seen to be the path to judicial wisdom and institutional prestige and stability.”
The court must always remember that “legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry” that exact wisdom and nice adaptation of remedy are not always possible and that “judgment is largely a prophecy based on meagre and uninterrupted experience”. Every legisla tion particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possi ble situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid.”
34. At page 988 it is held:
“That would depend upon diverse fiscal and economic considerations based on practical necessity and administrative expediency and would also involve a certain amount of experimentation on which the Court would be least fitted to pronounce. The court would not have the necessary competence and expertise to adjudicate upon such an economic issue. The court cannot possibly assess or evaluate what would be the impact of a particular immunity or exemption and whether it would serve the purpose in view or not. There are so many imponderables that would enter into the determination that it would be wise for the court not to hazard an opinion where even economists may differ. The court must while examining the constitutional validity of a legislation of this kind, “be resilient, not rigid, forward looking, not static, liberal, not verbal” and the court must always bear in mind the constitutional proposition enunciated by the Supreme Court of the United States in Munn vs. Illinois (94 U.S. 13) namely, “that courts do not substitute their social and economic beliefs for the judgment of legislative bodies”. The court must defer to legislative judgment in matters relating to social and economic policies and must not interfere, unless the exercise of legislative judgment appears to be palpably arbitrary. The court should constantly remind itself of what the Supreme Court of the United States said in Metropolis Theater Co. v. City of Chicago (57 Lawyers’ Edition 730) , “The problems of government are practical ones and may justify, if they do not require, rough accommodations, illogical it may be, and unscientific. But even such criticism should not be hastily expressed. What is best is not always discernible, the wisdom of any choice may be disputed or condemned. Mere errors of government are not subject to our judicial review.”
35. No doubt, the impugned legislation places restrictions on the right of the appellants to carry on business, but what is essential is to safeguard the rights of various depositors and to see that they are not preyed upon. From the earlier narration, it would be clear that the Reserve Bank of India, right from 1966, has been monitoring and following the functioning of non-banking financial institutions which invite deposits and then utilise those deposits either for trade or for other various industries. A ceiling for acceptance of deposits and to require maintenance of certain liquidity of funds as well as not to exceed borrowings beyond a particular percentage of the net-owned funds have been provided in the corporate sector. But for these requirements, the depositors would be left high and dry without any remedy.
36. Even the corporate sector was not free from blame. It had done damage to the economy and brought ruination to small depositors. This was why Section 58A in the Companies Act of 1956 came to be introduced. It is worthwhile to quote the notes on clauses concerning this provision:-
“It has been the practice of the companies to take deposits from the public at high rates of interest. Experience had shown that in many cases deposits taken by the companies have not been refunded on the due dates, either the companies have gone in liquidation or funds are depleted to such an extent that the companies are not in a position to refund the deposits, it was accordingly considered necessary to control the activities of the companies when accepting deposits from the “the public.” ”
37. We approve of the reasoning of the Delhi High Court in Kanta Mehta’s case (supra). At pages 798-99 it runs as follows:
“The danger of allowing deposits to be accepted without regulation is so acute and urgent, that to bind the hands of the Legislature that only one course alone is permissible and not to permit a play of joints would be to totally make it ineffective in meeting the challenge of the social evil. For, it must be remembered that “In the ultimate analysis, the mechanics of any economic legislation has necessarily to be left to the judgment of the executive and unless it is patent that there is hostile discrimination against a class, the processual basis of price fixation has to be accepted in the generality of cases as valid.” (See Prag Ice and Oil Mills v. Union of India, AIR 1978 SC 1296, para 50). Also such provisions meant to check such evil must be viewed, as Krishna Iyer J. said, through a socially constructive, not legally captious, microscope to discover glaring unconstitutional infirmity, that when laws affecting large chunks of the community are enacted, stray misfortunes are inevitable and that social legislation, without tears, affecting vested rights is virtually impossible. (See B. Banerjee v. Smt. Anita Pan, AIR 1975 SC 1146, at pages 1150-51).
The stress by learned counsel for the petitioners on the private right of the petitioners to have unrestricted deposits and make advances in any manner they like must receive short shrift, for by now, it is too well settled to be doubted that private rights must yield to be public need and that any form of regulation is unconstitutional only if arbitrary, discriminatory or demonstrably irrelevant to the policy the Legislature is free to adopt.”
38. May be, Kerala Act restricts the rates of interest under Section 4(2)(iii) but that cannot enable the writ petitioners in W.P.Nos.508 and 534 of 1988 to disregard these provisions, being the non-banking financial institutions.
39. Hence, we reject the first of the arguments.
40. As regards the reasonableness of two-year period Section 45 (I) (bb) of the Reserve Bank Act defines “deposit” as follows:
“(bb) “deposit” includes and shall be deemed always to have included any receipt of money by way of deposit or loan or in any other form, but does not include –
(i) amounts raised by way of share capital;
(ii) amounts contributed as capital by partners of a firm;
(iii) any amount received from, –
(iv) any amount received from, –
(a) the Development Bank;
(b) a State Financial Corporation established under the State Financial Corporations Act, 1951;
(c) any financial institution specified in or under section 6A of the Industrial Development Bank of India Act, 1964; or
(d) any other financial institution that may be specified by the Bank in this behalf;
(v) amounts received, in the ordinary course of business, by way of security deposit or dealership deposit;
(vi) any amount received from an individual or a firm or an association of individuals not being a body corporate, registered under any enactment relating to money lending which is, for the time being in force in any State; and
(vii) any amount received by way of subscriptions in respect of a conventional chit.”
41. Therefore, as rightly argued by Mr. Anil Diwan as per this definition, if there are enough sources of deposit there is no reason why the appellants and the writ petitioners cannot reduce the deposits. Further, non-banking financial companies are required under clause 4 sub-clause (3) as follows:
“(3) Every non-banking financial company, not being a hire- purchase finance company, or a holding finance company, which on the date of commencement of these directions holds deposits in excess of twenty five per cent of its paid-up capital and free reserves shall secure before the expiry of a period of two years from the date of such commencement, by taking such steps as may be necessary for this purpose, that the deposits, received by the company and outstanding on its books are not in excess of the aforesaid limit.”
42. These directions came into force from 1st of January, 1967. Similar directions came to be issued as Miscellaneous Non-Banking Companies (Reserve Bank) Directions. Clause 5 dealing with acceptance of deposits states as under:
“Acceptance of deposits by miscellaneous non-banking companies:
On and from 1st of July, 1977, no miscellaneous non-banking company shall:-
(a) receive any deposit repayable on demand or on notice, or repayable after a period of less than six months and more than thirty-six months from the date of receipt of such deposit or renew any deposit received by it, whether before or after the aforesaid date unless such deposit, on renewal, is repayable not earlier than six months and not later than thirty-six months from the date of such renewal;
Provided that where a miscellaneous non-banking company has before the 1st July, 1977, accepted deposits repayable after a period of more than thrity-six months, such deposits shall, unless renewed in accordance with these directions, be repaid in accordance with the terms of such deposits;
Provided further that nothing contained in this clause shall apply to monies raised by the issue of debentures or bonds.
(b) receive or renew:-
(i) any deposit against an unsecured debenture or any deposit from a shareholder (not being a deposit received by a private company from its shareholders as is referred to in clause (vi) or paragraph 4) or any deposit guaranteed by any person who, at the time of giving such guarantee, was or is a director to the company, if the amount of any such deposit together with the amount of such other deposits of all or any of the kinds referred to in this sub-clause and outstanding in the books of the company as on the date of acceptance or renewal of such deposits, exceeds fifteen per cent of its net owned funds.
(ii) any other deposit, if the amount of such deposit, together with the amount of such other deposits, not being deposits of the kind referred to in sub-clause (i) of this clause already received and outstanding in the books of the company as on the date of acceptance of such deposits, exceeds twenty five per cent of its net owned funds.”
43. If, therefore, this was the position, it cannot be contended that suddenly the companies like the appellants and the petitioners are called upon to reduce deposits. Even otherwise, the interests of the depositors is the prime concern.
44. Coming to the last point, as to whether Section 58B (5A) is violative of Article 20(1) of the Constitution, we find, when a similar argument was raised against Section 58A of the Companies Act, that was repelled by this Court in Delhi Cloth and General Mills v. Union of India ( 1983 (3) SCR 438 at page 468 ) which runs thus:
“Mr. G.A. Shah canvassed one more contention. After stating that Rule 3A became operative from April 1, 1978, he specifi cally drew attention to the proviso to Rule 3A (1) which re quired that with relation to the deposits maturing during the year ending on the 31st day of March, 1979, the sum required to be deposited or invested under sub-rule 3A (1) shall be depos ited or invested before the 30th day of September, 1978. It was then contended that this provision would necessitate depos iting 10% of the deposits maturing during the year ending 31st March, 1979 which may have been accepted prior to the coming into force of rule 3A and to this extent the rule has been made retrospective and as there was no power conferred by sec. 58A to prescribe conditions subject to which deposits can be ac cepted retrospectively Rule 3A is ultra vires sec. 58A. Un questionably, Rule 3A is to deposit 10% of the deposits matur ing during the year in the manner prescribed in Rule 3. Some deposits would be maturing between April 1, 1978 and March 31, 1979. To provide for such marginal situation, a proviso is inserted. Does it to make the rule retroactive ? Of course, not. In D.S. Nakara v. Union of India (1983 (1) SCC 305) a Constitution Bench of this Court has, in this context, observed as under:
“A statute is not properly called a retroactive statute because a part of the requisites for its action is drawn from a time antecedent to its passing.”
Viewed from this angle, the provision can be properly called prospective and not retroactive. Therefore, the contention does not commend to us.”
45. In the light of this, we should hold that the ruling of the Madras High Court in Chinoy Bottling Co. Pvt. Ltd. (supra) is incorrect.
46. As to the plight of these depositors we need only to quote the case in Peerless General Finance and Investment Co. Ltd. (1987 (1) SCC 424). At paragraph 37 it is held:
“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 compa nies’ offering staggeringly high rates of interest to deposi tors 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 invit ing 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 vaca tion, carried as many as ten advertisements with ‘banner head lines’, 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 inter est 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 depos its 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 inves tors. 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 affect ing public economy, the desire to take 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.”
47. And paragraph 42 also requires to be quoted:
“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 the 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 placed upon persons who are not conversant with the practice of such financial enterprises who pose themselves as benefactors of people.”
48. We may also add that this has been reaffirmed in Peerless General Finance and Investment Co. Ltd. v. Reserve Bank of India
* (JT 1992 (1) SC 405 = 1992 (2) SCC 343 @ 354.)
49. Therefore, we are in entire agreement with the Delhi High Court.
50. Since, as we have stated above, all the appellants and writ petitioners were praying for time to comply with these provisions, the matter was adjourned from time to time. Though some of them have complied with the requirements of law yet a few others have not done so. We make it clear that in spite of this indulgence, their failure to comply cannot be countenanced.
51. We dismiss the appeals and the petitions along with I.A.Nos.1 and 2 in C.A.No.5513 of 1985. However, there shall be no orders as to cost.
1. All these civil appeals arise by certificate granted by the High Court of Delhi against the decision reported in Kanta Mehta v. Union of India and others ( Company Cases Vol. 62 1987 Page 769 ).
2. All these civil appeals and writ petitions challenge the constitutional validity of Chapter III-C read with section 58B (5A) of the Reserve Bank of India Act, 1934, introduced by the Banking Laws (Amendment) Act, 1983 (Act 1 of 1984). Hence, they are dealt with under a common judgment.
3. In order to appreciate the challenge the necessary legal background may be set out.
4. In the year 1949, the Banking Regulation Act of 1949 was enacted. That contained regulatory provisions in regard to banking under the surveillance of the Reserve Bank of India as to what would constitute “banking” as defined under Section 5(b) of the 1949 Act.
5. In the year 1959, the Banking Companies (Amendment)Act, 1959 was passed. Sections 17 and 18 were substituted which required banking companies to create reserve fund and maintain cash reserve. In the year 1963, Banking Laws (Miscellaneous Provisions) Act, 1963 inserted Chapter III-B in the Reserve Bank of India Act. This Chapter conferred extensive powers on the Reserve Bank of India to issue suitable instructions, to regulate and monitor diverse activities of non-banking companies. The powers to control and regulate these non-banking institutions are set out in Sections 45-I to 45-L. While exercising these powers, the Reserve Bank of India was issuing various directions to these non-banking financial institutions. One such important direction was issued on 1st of January, 1967 to the effect that the non-banking financial companies were not to hold deposits in excess of 25 per cent of its paid-up capital and the reserves as also to non-banking, non-financial companies. They were also required to take steps to keep the deposits within the limits. This direction was challenged unsuccessfully before the Madras High Court as seen from the case reported in 1971 41 Company Cases 890 (Mayavaram Financial Corporation vs. Reserve Bank of India).
6. In 1968, by Banking Laws (Amendment) Act, 1968, Sections 10A to 10D were introduced. Section 10A provided that the Board of Directors shall include persons with professional or special knowledge. Section 10A(5) empowered the Reserve Bank of India to vary the composition of the Board.
7. When a report of the Study Group of non-banking financial intermediaries was submitted in the year 1971 that was studied. Thereafter in 1973 the Reserve Bank of India issued Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1973 placing certain restrictions on companies carrying on prize chit and chit business from receiving deposits from the public.
8. In 1974, Section 58A of the Companies Act was inserted by the Companies (Amendment) Act of 1974, which came into force from 1st of February, 1975. The object was to regulate deposits received by non-banking non-financial companies. The financial companies were already covered by Reserve Bank of India directions under the Reserve Bank of India Act. Therefore, they were exempted under Section 58A (7) from the purview of that Section. Since the non-banking non-financial companies came within the purview of Section 58A, the earlier directions issued by the Reserve Bank of India Act to non-banking non-financial companies in the year 1966 were withdrawn. By an amendment of 1977, Section 58A was further enlarged and the Central Government was empowered to grant extensions.
9. In June 1974, another Study Group was constituted which is popularly known as James Raj Committee.
10. In July 1975, the above Study Group gave its report. In accordance with the recommendations of the Study Group elaborate rules were issued by the Central Government under Section 58A, called Banking Companies (Acceptance of Deposits) Rules, 1975 with a view to regulate the various activities of the companies to accept deposits from public. The validity of the section and the deposit rules were questioned. This Court in DCM Ltd. v. U.O.I. (1983 (3) SCR 438) upheld the same.
11. In 1977, directions were issued by the Reserve Bank of India superseding earlier directions of 1966 and 1973.
12. In 1978, Bill 183 of 1978 called Banking Laws (Amendment) Bill, 1978 was introduced in the Parliament. The said Bill provided limits on depositors which were lower than the current provisions. However, the Bill lapsed on dissolution of Parliament. Thereafter prize chits and Money Circulation Schemes (Banning) Act, 1978 was enacted. This was also challenged. But that challenge was thrown out by this Court in Srinivasa Enterprises v. Union of India ( 1981 (1) SCR 801 ).
13. In 1981, several new regulatory directions were given by the Reserve Bank of India. Inter alia they included restrictions on accepting or renewing deposits from shareholders, Directors etc. which exceeded 15 per cent of the net-owned funds of the companies as also restricted payment of interest on deposits at a rate of interest exceeding 15 per cent per annum. The validity of the amendments was upheld by the Madras High court in the case reported in AIR 1983 Madras 330 (A.S.P. Ayar vs. Reserve Bank of India).
14. In State of West Bengal v. Swapan Kumar Guha known as Sanchaita case, reported in 1982 (3) SCR 121, this Court while quashing the F.I.R. launched against the firm, Sanchaita Investments, directed that the Government and Reserve Bank of India should look into the matter deeply. It is in this background the Banking Laws (Amendment) Act, 1983 came to be enacted. Section 45S states thus:
Deposits not to be accepted in certain cases.
“45S. (1) No person, being an individual or a firm or an unincorporated association of individuals, shall, at any time, have deposits from more than the number of depositors specified against each, in the table below:-
TABLE
(i) Individual – Not more than ten depositors.
(ii) Firm – Not more than ten depositors per
partner and not more than forty
depositors in all.
(iii) Association – Not more than ten of individuals
depositors per individual and not
more than forty depositors in all.
(2) Where at the commencement of the Banking Laws (Amendment) Act, 1978 the deposits held by any such person are not in accordance with sub-section (1), he shall repay such of the deposits as shall fall due for repayment immediately after the commencement of that Act so as to bring the number of depositors within the relative limit specified in that sub- section.
Explanation – Where a deposit has been made by two or more persons, it shall, for the purposes of this section, be deemed to have been made by as many depositors as there are number of persons making such deposit.”
15. Thus, the number of depositors has come to be limited.
16. As to the penalty for contravention of Section 45S it is provided for under Section 58B (5A). It runs thus:
“(5A). If any person contravenes any provision of Section 45S, he shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of deposit received by such person in contravention of that section or rupees two thousand, whichever is more, or with both.”
17. These provisions were challenged by the appellants in the various civil appeals as violative of Articles 14 and 19 of the Constitution. A Division Bench of the High Court of Delhi in Kanta Mehta’s case (supra) held:
“Section 45S read with section 58B (5A) of chapter III-C of the Reserve Bank of India Act, 1934, as introduced by section 10 of the Banking Laws (Amendment) Act, 1983, is not violative of articles 14 and 19 of the Constitution. There is nothing demonstrably irrelevant or perverse in limiting in section 45S the number of depositors that an individual, firm or association could accept.
Nor is there any element of compulsion on individuals and firms or associations which are not incorporated to incorporate themselves as a company and article 19(1)(c) is not violated by the provisions of section 45S limiting the number of depositors whom individuals, firms and unincorporated associations could accept.
Chapter III-C of the Reserve Bank of India Act, 1934, imposes reasonable restrictions on the right of individuals, firms and unincorporated associations to carry on the business of acceptance of deposits and advancing or giving loans to the public. There is also a further safeguard that Chapter III-C is being operated under the supervision and control of the Reserve Bank of India.
The business of acceptance of deposits from the public does not fall within entry 30 or entry 32 of List II of Schedule VII of the Constitution. It falls within entry 45 or in any case under entry 97 of List I of Schedule VII under which only Parliament has power to pass the impugned legislation. Parliament had full competence and power to pass Chapter III-C of the Reserve Bank of India Act, 1934.”
18. Mr. G. Viswanatha Iyer, learned counsel for the writ petitioners in WP.Nos. 508 and 534 of 1988 submits that Section 45B is violative of the fundamental right under Article 19(1)(g) of the Constitution as it restricts the number of depositors and the rate of interest under Section 4(2)(iii) of the Kerala Money-Lenders Act, 1958 (hereinafter referred to as the Kerala Act).
19. The two years’ period prescribed under Section 42 is unreasonable.
20. Under Kerala Act, with effect from 15.10.85 only 14 per cent interest alone could be charged.
21. In any event, while receiving deposits it was not an offence, making it a criminal liability and directing payment, would amount to ex post facto law, offending Article 20(1) of the Constitution. In support of this submission, reliance is placed on Chinoy Bottling Co. Pvt. Ltd. v. Assistant Registrar of Companies, Madras 61 Company Cases 1986 page 770 and Oudh Sugar Mills Ltd. v. Union of India ( AIR 1970 SC 1070).
22. The other learned counsel seriously pressed the point relating to criminal liability and prayed for time to comply with the provisions of Section 45S.
23. Mr. Anil B. Diwan, learned counsel appearing for Respondent 2 in C.A. No.447 of 1986, after referring us to the development of law, would submit that it is open to the Government to regulate the economic activities. While examining the validity of such provisions the courts always have regard to the wisdom of the Legislature because that alone has the necessary information and expertise pointing to the need of such a legislation.
24. In R.K. Garg v. Union of India 1982 (1) SCR 947 at 969-70 this aspect of the matter was highlighted.
25. It was in this view, this Court upheld Maharashtra Debt Relief Act, 1976 in Fatehchand Himmatlal and others v. State of Maharashtra (1977 (2) SCR 828). If properly analysed, it can be seen that these provisions constitute a regulatory scheme and not a penal liability.
26. Much is made of the penal provisions under Section 58B (5A). It is submitted that imprisonment of a recalcitrant debtor is permissible in law. If one goes by the facts of these cases even after 1986, they collect deposits when law required them not to do so.
27. Under Section 45(I)(bb) deposit has been defined. If as per the definition there are enough sources of deposit there is no reason why the appellants cannot reduce the deposits. If, therefore, the package is reasonable there is no justification to dilute the effect of Section 58B (5A). While examining the scope of the Section it might be contrasted with Section 125 (3) of the Criminal Procedure Code wherein a sufficient cause is provided.
28. In Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. 1 ( 1987 (1) SCC 424 ) this Court had occasion to consider the adventures indulged by the persons like appellants. It criticised the fraud played by such financial vultures.
29. This approach was approved in Peerless General Finance and Investment Co. Ltd. v. Reserve Bank of India2
30. The learned counsel also draws our attention to the Non-banking Financial Companies (Reserve Bank) Directions of 1966. They came into force on January 1, 1967. Clause 4 sub-clause (3) specifically provides that the deposit shall be reduced to 25 per cent of the paid-up capital for which two-year period was provided. Similar directions of 1977 known as Non-Banking Financial Companies (Reserve Bank) Directions, 1977 came to be issued with effect from 1st of July, 1977.
31. There were complaints, even then, that the financial companies were not paying interest regularly and the Reserve Bank was requested to help the depositor. Therefore, in the teeth of this provision, to say that suddenly the appellants and the writ petitioners are called upon to reduce, would work hardship and they should not be penalised, is incorrect. They took a calculated risk and, therefore, they had to suffer for their own fault.
32. In examining the various submissions addressed on behalf of the appellants and the petitioners we propose to examine the same in the following background since it is a law relating to regulation of economic activities.
33. In R.K. Garg’s case (supra) it is held at pages 969-70:
“Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc.
It has been said by no less a person than Holmes, J. that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or straight jacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The greater play in the joints has to be allowed to the legislature. The court should feel more inclined to give judicial deference to legislature judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Dond (354 US 457) where Frankfurter, J. said in his inimitable style:
“In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events – self – limitation can be seen to be the path to judicial wisdom and institutional prestige and stability.”
The court must always remember that “legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry” that exact wisdom and nice adaptation of remedy are not always possible and that “judgment is largely a prophecy based on meagre and uninterrupted experience”. Every legisla tion particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possi ble situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid.”
34. At page 988 it is held:
“That would depend upon diverse fiscal and economic considerations based on practical necessity and administrative expediency and would also involve a certain amount of experimentation on which the Court would be least fitted to pronounce. The court would not have the necessary competence and expertise to adjudicate upon such an economic issue. The court cannot possibly assess or evaluate what would be the impact of a particular immunity or exemption and whether it would serve the purpose in view or not. There are so many imponderables that would enter into the determination that it would be wise for the court not to hazard an opinion where even economists may differ. The court must while examining the constitutional validity of a legislation of this kind, “be resilient, not rigid, forward looking, not static, liberal, not verbal” and the court must always bear in mind the constitutional proposition enunciated by the Supreme Court of the United States in Munn vs. Illinois (94 U.S. 13) namely, “that courts do not substitute their social and economic beliefs for the judgment of legislative bodies”. The court must defer to legislative judgment in matters relating to social and economic policies and must not interfere, unless the exercise of legislative judgment appears to be palpably arbitrary. The court should constantly remind itself of what the Supreme Court of the United States said in Metropolis Theater Co. v. City of Chicago (57 Lawyers’ Edition 730) , “The problems of government are practical ones and may justify, if they do not require, rough accommodations, illogical it may be, and unscientific. But even such criticism should not be hastily expressed. What is best is not always discernible, the wisdom of any choice may be disputed or condemned. Mere errors of government are not subject to our judicial review.”
35. No doubt, the impugned legislation places restrictions on the right of the appellants to carry on business, but what is essential is to safeguard the rights of various depositors and to see that they are not preyed upon. From the earlier narration, it would be clear that the Reserve Bank of India, right from 1966, has been monitoring and following the functioning of non-banking financial institutions which invite deposits and then utilise those deposits either for trade or for other various industries. A ceiling for acceptance of deposits and to require maintenance of certain liquidity of funds as well as not to exceed borrowings beyond a particular percentage of the net-owned funds have been provided in the corporate sector. But for these requirements, the depositors would be left high and dry without any remedy.
36. Even the corporate sector was not free from blame. It had done damage to the economy and brought ruination to small depositors. This was why Section 58A in the Companies Act of 1956 came to be introduced. It is worthwhile to quote the notes on clauses concerning this provision:-
“It has been the practice of the companies to take deposits from the public at high rates of interest. Experience had shown that in many cases deposits taken by the companies have not been refunded on the due dates, either the companies have gone in liquidation or funds are depleted to such an extent that the companies are not in a position to refund the deposits, it was accordingly considered necessary to control the activities of the companies when accepting deposits from the “the public.” ”
37. We approve of the reasoning of the Delhi High Court in Kanta Mehta’s case (supra). At pages 798-99 it runs as follows:
“The danger of allowing deposits to be accepted without regulation is so acute and urgent, that to bind the hands of the Legislature that only one course alone is permissible and not to permit a play of joints would be to totally make it ineffective in meeting the challenge of the social evil. For, it must be remembered that “In the ultimate analysis, the mechanics of any economic legislation has necessarily to be left to the judgment of the executive and unless it is patent that there is hostile discrimination against a class, the processual basis of price fixation has to be accepted in the generality of cases as valid.” (See Prag Ice and Oil Mills v. Union of India, AIR 1978 SC 1296, para 50). Also such provisions meant to check such evil must be viewed, as Krishna Iyer J. said, through a socially constructive, not legally captious, microscope to discover glaring unconstitutional infirmity, that when laws affecting large chunks of the community are enacted, stray misfortunes are inevitable and that social legislation, without tears, affecting vested rights is virtually impossible. (See B. Banerjee v. Smt. Anita Pan, AIR 1975 SC 1146, at pages 1150-51).
The stress by learned counsel for the petitioners on the private right of the petitioners to have unrestricted deposits and make advances in any manner they like must receive short shrift, for by now, it is too well settled to be doubted that private rights must yield to be public need and that any form of regulation is unconstitutional only if arbitrary, discriminatory or demonstrably irrelevant to the policy the Legislature is free to adopt.”
38. May be, Kerala Act restricts the rates of interest under Section 4(2)(iii) but that cannot enable the writ petitioners in W.P.Nos.508 and 534 of 1988 to disregard these provisions, being the non-banking financial institutions.
39. Hence, we reject the first of the arguments.
40. As regards the reasonableness of two-year period Section 45 (I) (bb) of the Reserve Bank Act defines “deposit” as follows:
“(bb) “deposit” includes and shall be deemed always to have included any receipt of money by way of deposit or loan or in any other form, but does not include –
(i) amounts raised by way of share capital;
(ii) amounts contributed as capital by partners of a firm;
(iii) any amount received from, –
(iv) any amount received from, –
(a) the Development Bank;
(b) a State Financial Corporation established under the State Financial Corporations Act, 1951;
(c) any financial institution specified in or under section 6A of the Industrial Development Bank of India Act, 1964; or
(d) any other financial institution that may be specified by the Bank in this behalf;
(v) amounts received, in the ordinary course of business, by way of security deposit or dealership deposit;
(vi) any amount received from an individual or a firm or an association of individuals not being a body corporate, registered under any enactment relating to money lending which is, for the time being in force in any State; and
(vii) any amount received by way of subscriptions in respect of a conventional chit.”
41. Therefore, as rightly argued by Mr. Anil Diwan as per this definition, if there are enough sources of deposit there is no reason why the appellants and the writ petitioners cannot reduce the deposits. Further, non-banking financial companies are required under clause 4 sub-clause (3) as follows:
“(3) Every non-banking financial company, not being a hire- purchase finance company, or a holding finance company, which on the date of commencement of these directions holds deposits in excess of twenty five per cent of its paid-up capital and free reserves shall secure before the expiry of a period of two years from the date of such commencement, by taking such steps as may be necessary for this purpose, that the deposits, received by the company and outstanding on its books are not in excess of the aforesaid limit.”
42. These directions came into force from 1st of January, 1967. Similar directions came to be issued as Miscellaneous Non-Banking Companies (Reserve Bank) Directions. Clause 5 dealing with acceptance of deposits states as under:
“Acceptance of deposits by miscellaneous non-banking companies:
On and from 1st of July, 1977, no miscellaneous non-banking company shall:-
(a) receive any deposit repayable on demand or on notice, or repayable after a period of less than six months and more than thirty-six months from the date of receipt of such deposit or renew any deposit received by it, whether before or after the aforesaid date unless such deposit, on renewal, is repayable not earlier than six months and not later than thirty-six months from the date of such renewal;
Provided that where a miscellaneous non-banking company has before the 1st July, 1977, accepted deposits repayable after a period of more than thrity-six months, such deposits shall, unless renewed in accordance with these directions, be repaid in accordance with the terms of such deposits;
Provided further that nothing contained in this clause shall apply to monies raised by the issue of debentures or bonds.
(b) receive or renew:-
(i) any deposit against an unsecured debenture or any deposit from a shareholder (not being a deposit received by a private company from its shareholders as is referred to in clause (vi) or paragraph 4) or any deposit guaranteed by any person who, at the time of giving such guarantee, was or is a director to the company, if the amount of any such deposit together with the amount of such other deposits of all or any of the kinds referred to in this sub-clause and outstanding in the books of the company as on the date of acceptance or renewal of such deposits, exceeds fifteen per cent of its net owned funds.
(ii) any other deposit, if the amount of such deposit, together with the amount of such other deposits, not being deposits of the kind referred to in sub-clause (i) of this clause already received and outstanding in the books of the company as on the date of acceptance of such deposits, exceeds twenty five per cent of its net owned funds.”
43. If, therefore, this was the position, it cannot be contended that suddenly the companies like the appellants and the petitioners are called upon to reduce deposits. Even otherwise, the interests of the depositors is the prime concern.
44. Coming to the last point, as to whether Section 58B (5A) is violative of Article 20(1) of the Constitution, we find, when a similar argument was raised against Section 58A of the Companies Act, that was repelled by this Court in Delhi Cloth and General Mills v. Union of India ( 1983 (3) SCR 438 at page 468 ) which runs thus:
“Mr. G.A. Shah canvassed one more contention. After stating that Rule 3A became operative from April 1, 1978, he specifi cally drew attention to the proviso to Rule 3A (1) which re quired that with relation to the deposits maturing during the year ending on the 31st day of March, 1979, the sum required to be deposited or invested under sub-rule 3A (1) shall be depos ited or invested before the 30th day of September, 1978. It was then contended that this provision would necessitate depos iting 10% of the deposits maturing during the year ending 31st March, 1979 which may have been accepted prior to the coming into force of rule 3A and to this extent the rule has been made retrospective and as there was no power conferred by sec. 58A to prescribe conditions subject to which deposits can be ac cepted retrospectively Rule 3A is ultra vires sec. 58A. Un questionably, Rule 3A is to deposit 10% of the deposits matur ing during the year in the manner prescribed in Rule 3. Some deposits would be maturing between April 1, 1978 and March 31, 1979. To provide for such marginal situation, a proviso is inserted. Does it to make the rule retroactive ? Of course, not. In D.S. Nakara v. Union of India (1983 (1) SCC 305) a Constitution Bench of this Court has, in this context, observed as under:
“A statute is not properly called a retroactive statute because a part of the requisites for its action is drawn from a time antecedent to its passing.”
Viewed from this angle, the provision can be properly called prospective and not retroactive. Therefore, the contention does not commend to us.”
45. In the light of this, we should hold that the ruling of the Madras High Court in Chinoy Bottling Co. Pvt. Ltd. (supra) is incorrect.
46. As to the plight of these depositors we need only to quote the case in Peerless General Finance and Investment Co. Ltd. (1987 (1) SCC 424). At paragraph 37 it is held:
“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 compa nies’ offering staggeringly high rates of interest to deposi tors 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 invit ing 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 vaca tion, carried as many as ten advertisements with ‘banner head lines’, 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 inter est 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 depos its 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 inves tors. 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 affect ing public economy, the desire to take 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.”
47. And paragraph 42 also requires to be quoted:
“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 the 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 placed upon persons who are not conversant with the practice of such financial enterprises who pose themselves as benefactors of people.”
48. We may also add that this has been reaffirmed in Peerless General Finance and Investment Co. Ltd. v. Reserve Bank of India
* (JT 1992 (1) SC 405 = 1992 (2) SCC 343 @ 354.)
49. Therefore, we are in entire agreement with the Delhi High Court.
50. Since, as we have stated above, all the appellants and writ petitioners were praying for time to comply with these provisions, the matter was adjourned from time to time. Though some of them have complied with the requirements of law yet a few others have not done so. We make it clear that in spite of this indulgence, their failure to comply cannot be countenanced.
51. We dismiss the appeals and the petitions along with I.A.Nos.1 and 2 in C.A.No.5513 of 1985. However, there shall be no orders as to cost.
