Nedumpilli Finance Company Limited vs State of Kerala & Ors.

HELD : Scheme of Kerala Act, Gujarat Act and RBI Act

1. In the background of the facts, the legal issue arising for consideration has to be resolved by looking at the scheme of the two State enactments, the scheme of RBI Act and the relevant Entries in the appropriate List of the Seventh Schedule, to which these enactments can be traced. [Para 4][1016-D-E]

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

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

4. But the definition of “money lender” in the Kerala Act excludes only a “bank” to which the Banking Regulation Act applies. It does not exclude a non banking institution from the definition. Therefore, the Kerala State authorities started claiming and technically rightly so, that NBFCs are not excluded from the definition of “money lender”. Though the NBFCs claimed that under clause (f) of sub-section (7) of Section 2, “any institution established by or under an Act of Parliament or the Legislature of a State” are excluded from the definition of the expression “money-lender” and that NBFCs are established under a Parliamentary enactment, this argument was found by the State to be based on a convoluted logic. The Court also thinks that the State was right in thinking so, since NBFCs are not established by or under an Act of Parliament or the legislature of a State. Incorporation/registration of a business entity under an Act of Parliament or the Legislature of a State, is completely different from being established by or under an Act. For instance, all companies are incorporated under the Companies Act. But a corporation like the LIC of India, is established under the LIC of India Act. Therefore, the appellants were not right in claiming that they fall under the exclusion clause in clause (f) of sub-section

(7) of Section 2. [Para 4.15][1020-H; 1021-A-D]

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

Role of RBI, the scheme of Chapter III-B of the RBI Act and the Regulatory measures taken by RBI from time to time 6.In contrast to the state enactments regulating the business of money lending, whose one-eyed focus is only the protection of borrowers, the RBI Act takes a holistic approach to the business of banking, money lending and operation of the currency and credit system of the country. But when RBI Act was enacted, the business of banking and finance was not as complicated as it later turned out to be. [Para 6.2][1026-B]

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

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

9. All the above led to the promulgation of the Reserve Bank of India (Amendment) Ordinance, 1997 on 09.01.1997. Subsequently, a bill was introduced which became the Reserve Bank of India (Amendment) Act, 1997. This Act completely revamped Chapter III-B by amending the definition provision in Section 45-I and inserting certain new provisions such as Section 45-IA, 45-IB, 45-IC, 45-JA, 45-MB, 45-MC etc. After the amendment made to Chapter III-B by Act 23 of 1997, this Chapter has become a complete Code in so far as NBFCs are concerned. This can be seen from various provisions of Chapter III-B. [Para 6.10][1029-F-H]

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

11. Once it is found that Chapter III-B of the RBI Act provides a supervisory role for the RBI to oversee the functioning of NBFCs, from the time of their birth (by way of registration) till the time of their commercial death (by way of winding up), all activities of NBFCs automatically come under the scanner of RBI. As a consequence, the single aspect of taking care of the interest of the borrowers which is sought to be achieved by the State enactments gets subsumed in the provisions of Chapter III-B. [Para 6.19][1035-E-F]

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

Is Chapter III-B a complete code?

13. To find out whether NBFCs registered under Chapter III-B of the RBI Act and regulated by RBI could still be controlled by the State enactments, because of the definition of the expression “money lender”, the Court first have to see whether Chapter III-B of the RBI Act is a complete code or not. [Para 7][1039-C-D]

14. No NBFC can commence or carry on business without obtaining the certificate of registration under the Act. Their continuation in business would depend upon compliance with certain prescriptions found in the RBI Act as well as the circulars/directions issued by RBI. The RBI has the power to supersede the Board of Directors of a NBFC and has power even to wind up a NBFC. Thus the supervision and regulation of NBFCs, by the RBI, is from the time of birth till the time of death. If a statutory enactment which provides for such a type of control and supervision is not a complete code in itself, the court does not know what else could be a complete code. In Integrated Finance Company Limited vs. Reserve Bank of India and Others, this Court held in para 47 of the Report that “Chapter III-B of the RBI Act is a complete code in itself”. [Paras 7 and 7.1][1039-D-F]

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

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

17. In Deep Chand v. State of U.P., the Constitution Bench of this Court reiterated three important tests of inconsistency or repugnancy, namely, (i) whether there is direct conflict between the two provisions; (ii) whether Parliament intended to lay down an exhaustive Code in respect of the subject matter replacing the Act of the State legislature; and (iii) whether the law made by Parliament and the law made by State legislature occupy the same field. Therefore, more than supporting the case of the State, Deep Chand actually supports the case of the NBFCs, as we have found that Chapter III-B is a complete code in itself. [Para 7.9][1041C-D] Doctrine of Eclipse, conflict and repugnancy

18. As indicated by the Constitution Bench in Deep Chand , a law may be valid when made, but a shadow may be cast on it by supervening constitutional inconsistency or supervening existing statutory inconsistency. Assuming that the Kerala Act was valid in its application to NBFCs when it was made, on the ground that the business of money lending is traceable to Entry 30 of List II, it has to give way for the parliamentary enactment. The moment the Parliament stepped in to codify the law relating to registration and regulation of NBFCs, by inserting certain provisions in Chapter III-B of the RBI Act, the same would cast a shadow on the applicability (even assuming it is applicable) of the provisions of the Kerala Act to NBFCs registered under the RBI Act and regulated by RBI. [Para 8][1041-E-F]

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

Is the argument of Conflict, a mirage?

20. It was argued on behalf of the State that without pointing out any area of conflict between the two enactments the NBFCs cannot invoke either Article 246 or Article 254. [Para 9][1045D]

21. But the above argument has no substance. Once it is admitted that the RBI Act is traceable to an entry in List-I, Article 246(1) comes into play. In any case, there are also areas of conflict. [Para 9.1][1045-D-E]

Overriding Effect

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

23. Though it was contended by the learned counsel appearing for the State of Gujarat that the Gujarat Act exempts NBFCs registered under the RBI Act from seeking registration under the Gujarat Act, the same would go to the rescue of State of Gujarat. Under Section 5(2) of the Gujarat Act, NBFCs registered under the RBI Act are deemed to have been registered under the Gujarat Act. Therefore, all other provisions of the Gujarat Act are sought to be applied to NBFCs operating in the State of Gujarat. The other provisions of the Gujarat Act include the (i) power of search and seizure; (ii) requirement to maintain certain books and registers and to furnish statements; and (iii) the mandate not to dispose of any article taken from a debtor as a pawn, pledge or security, before a period of two years from the date stipulated for final payment, etc. The Gujarat Act also empowers the Civil Court under Section 30 to reopen certain transactions and to limit the interest recoverable. Section 32 of the Gujarat Act empowers the borrower to deposit the money before a Civil Court and the civil Court to assume jurisdiction of the adjudication of the dispute. Interestingly, Gujarat Act, 2011 tacitly recognizes the regulation of NBFCs under the RBI Act. Yet the State got the assent of only the Governor. [Paras 10.1, 10.2][1046-C-F]

24. The Kerala Act and the Gujarat Act will have no application to NBFCs registered under the RBI Act and regulated by RBI. Therefore, all the appeals filed by NBFCs against the judgment of the Kerala High Court are allowed. Likewise the appeals filed by the State of Gujarat against the judgment of the Gujarat high Court are dismissed. [Para 11][1046-G] Deep Chand vs. State of U.P. AIR 1959 SC 648 : [1959] Suppl. SCR 8 – followed.

Internet and Mobile Association of India vs. Reserve Bank of India (2020) 10 SCC 274 : [2020] 2 SCR 297; Innoventive Industries Limited vs. ICICI Bank and Anr. (2018) 1 SCC 407 : [2017] 8 SCR 33 – relied on. Integrated Finance Company Limited vs. Reserve Bank of India and Others (2015) 13 SCC 772 : [2013] 13 SCR 938; Zaverbhai Amaidas vs. State of Bombay AIR 1954 SC 752 : [1955] SCR 799; Tika Ramji vs. State of U.P. AIR 1956 SC 676 : [1956] SCR 393; UCO Bank and Another vs. Dipak Debbarma and Others (2017) 2 SCC 585 : [2016] 11 SCR 723; State of West Bengal and Others vs. Committee for Protection of Democratic Rights, West Bengal and Others (2010) 3 SCC 571 : [2010] 2 SCR 979; Kailash Sonkar vs. Smt. Maya Devi (1984) 2 SCC 91 : [1984] 2 SCR176 – referred to.