Reserve Bank of India Vs. Peerless General Finance & Investment Co. Ltd. Ors [1987] INSC 21 (22 January 1987)
Reddy, O. Chinnappa (J) Reddy, O. Chinnappa (J) Khalid, V. (J)
CITATION: 1987 AIR 1023 1987 SCR (2) 1 1987 SCC (1) 424 JT 1987 (1) 246 1987 SCALE (1)100
CITATOR INFO : R 1988 SC 492 (16) RF 1988 SC1883 (162) R 1992 SC 81 (12) RF 1992 SC1033 (2,3,4,18,26,30,34,45,68)
ACT:
Interpretation of statute--Text and Context bases value of, explained--Whether the two clauses (i) and (ii) in section 2(e) of the definition of "Prize chit" in Prize Chits and Money Circulation Scheme (Banning) Act, 1978 are to be read disjunctively--Phrase "for all or any of the following purposes", construction of.
Prize Chits and Money Circulation Scheme (Banning) Act, 1978 section 2(e)--Definition of "prize chit"--Whether the Endowment Certificate Scheme of the Peerless Company attracts the provisions of the Act.
Constitution of India, 1950, Articles 38, 39, 41 and 43--Goal of minimising inequalities of income--Failure of the Life Insurance Corporation in this regard deprecated--Need to improve their efforts to devise several methods to serve the poorer sections of the people, stressed.
HEAD NOTE:
The Peerless General Insurance and Investment Co. Ltd. was incorporated in 1932. After the nationalisation of the business of life insurance, the name of the company was changed to "the Peerless General Finance and Investment Co. Ltd." For over a quarter of a century now, the business of the company has been that of finance and investment. The company offers three schemes, the principal of which is the Endowment Certificate Scheme. Under this scheme, a subscriber is required to pay a fixed annual subscription for a fixed number of years varying between the minimum of 10 years and the maximum of 30 years. On the expiry of the period, the subscriber will be paid by the company a sum of money called the Endowment Sum which is the face value of the Certificate. The subscriber is also entitled to be paid a guaranteed fixed bonus. If any instalment, that is, any amount of annual subscription is not paid within the stipulated period and period of grace, the Certificate lapses unless it has acquired a surrender value. A Certificate acquires surrender value after the expiry of three years from the date of commencement of the subscription for two full years has 2 been paid. A Certificate which has not acquired surrender value lapses on non-payment of instalments and the amounts paid become forfeit to the company. A lapsed certificate may, however, be revived at any time before the expiry date of maturity on payment of all dues together with interest at one paisa per rupee per month. There is also provision in the scheme for conversion of the Certificate into a paid up Certificate, the paid up amount to be paid at the end of the period, but without bonus. A person purchasing a Certificate automatically becomes entitled to a free accident insurance policy under a group insurance scheme.
A noticeable feature of the scheme is the remarkably low yield to subscriber on his investment. Not only that, the subscriber is always at the losing end. Despite the same, the message of Peerless is made to penetrate the rural areas to tap the small savings of the poor ignorant villagers through a special structure of agents, special agents, suborganizers, special organizers and so on chosen from amongst those noted for their social political or official connections. The agents' Commission was 30% (now 35%) of the first year's subscription and 5% only of subsequent years' subscription. The incentive of 30% of the collection of the subscription of the first year automatically operates as a disincentive for collecting subscriptions of subsequent years resulting in heavy default in payment and forfeiture of subscriptions earlier paid. The first subscription is literally shared between the company and its agents under the method of accountancy adopted by the company treating the entire amount as income and not liability of the company. The company adopted the "actuarial system" of accountancy followed by the Life Insurance Corporation, though the company itself does not and cannot do insurance business.
However, the company has now deleted the "forfeiture clause" and everyone is entitled to payment after the maturity period of the certificate.
Section 45K of the Reserve Bank of India Act empowers the Reserve Bank to collect information from Non-Banking Institutions as to deposits and to give directions in the public interest, 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." Section 45L empowers the Reserve Bank to call for information from financial institutions and to give directions, in particular directions relating to the conduct of business by them, etc.
Taking advantage of the 1970 Report of the Banking Commission's Study Group headed by Dr. Bhabatosh Dutta on the role of various non-banking financial institutions, the Reserve Bank purporting to exercise its powers under Sections 45L and 45K of 3 the Reserve Bank of India Act gave certain directions called "Miscellaneous Non-Banking Companies (Reserve Bank) Directions 1973". Para 4(a) prescribed six months as the minimum period for which a Miscellaneous Non-Banking Company could accept a deposit, but no maximum period was prescribed.
Paragraph 4(b)(ii) prescribed a ceiling of 25% of the aggregate of the paid up capital and free reserve of the company in the case of deposits accepted by Miscellaneous NonBanking Companies. Paragraph 13 enabled the Reserve-Bank to exempt any company or class of companies from, all or any of the provisions of the directions either generally or for a specified period, if it considered necessary for avoiding any hardship or for any other just and sufficient reason.
On September 14, 1973 the Peerless Company addressed a letter to the Reserve Bank of India explaining the nature of their business and claiming that their business was outside the scope of the directions issued by the Reserve Bank, while pointing out that their business was a special type, that it was carried on scientific lines and actuarial principles, that over 90% of the concerned public fund was invested in Government securities and in nationalised Banks.
The Reserve Bank of India by their order dated December 3, 1973 exempted the company from the provisions of paragraph 4 of the notification in so far as those provisions restricted the acceptance of subscriptions under the scheme upto 25% of the paid-up capital and free reserve fund. Certain conditions were, however, imposed. The company was directed to transfer every year to the reserve fund a sum not less than 50% of the profit after taxes. The company was directed not to declare any dividend at rates higher than 6% and 7% on ordinary and preferential shares till the free reserve became equal to the paid-up capital. The company was also required to maintain not less than 75% of its total assets in the form of investments and Government Trustee-securities, etc. The company was directed to submit every year a certificate from their Auditors in regard to compliance with the conditions imposed. The exemption was to be reviewed every two years. The said exemption was granted, having regard to the satisfactory financial position of the Peerless and the fact that it was a well established one and having regard to the certificate furnished by the actuarial consultant of the Peerless supported by data.
In the year 1974, there was yet another Study Group headed by Dr. J.S. Raj appointed this time by the Reserve Bank. In para 6.21 the Study Group made its recommendations for a total ban on the conduct of prize chits of the kind described by them in paragraph 6.3. Simple Recurring Deposits Schemes were not contemplated.
4 Thereafter, as a follow up of the recommendations of the Raj Committee, in 1977 two sets of directions were issued by the Reserve. Bank, called the Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977 and the Non-Banking Financial Companies (Reserve Bank) Directions. 1977.
Paragraph 5 of the Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977 which corresponded to paragraph 4 of the 1973 directions, however, made a radical departure from the earlier provision. For the first time, a ceiling was fixed on the period for which deposits could be accepted. It was provided that the period of a deposit could not be more than thirty-six months. Paragraph 14 also vasted in the Reserve Bank the power to grant exemption in suitable cases. Paragraph 5(1) of the Miscellaneous Non-Banking Financial Companies (Reserve Bank) Directions, 1977 dealt with period of deposits for hire-purchase finance, loan and investment companies and provided that the period of deposits shall not be less than six months or more than thirtysix months. Paragraph 19 made the directions applicable to a loan company also applicable to every company which was a "financial institution" but not belonging to any of the categories of companies mentioned in paragraph 2(1) or which was not a miscellaneous non-banking company within the meaning of the Miscellaneous Non-Banking Companies Directions, 1977.
Thereafter in 1978 the Prize Chits and Money Circulation Schemes (Banning) Act 1978 was enacted "to ban the promotion or conduct of prize chits and money circulations schemes and for matters connected therewith or incidental thereto. Section 2(a) defines "Conventional Chits" on practically the same lines as the type of business covered by the second part of paragraph 2 of the Miscellaneous NonBanking Companies (Reserve Bank) Directions 1973 and the Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977. Section 3, banned not merely promoting or conducting any prize chit or money circulation but also on participation in the Scheme of any kind contravention of which carried penal action. Section 11 exempts from the operation of the Act prize chits or money circulation schemes promoted by a State Government or any office or authority on its behalf, a company wholly owned by a State Government which does not carry on any business other than the conducting of a prize chit or money circulation scheme, a banking institution notified by the Central Government under Section 51 of the Banking Regulation Act, the State Bank of India or a subsidiary bank of the State Bank of India or a corresponding new bank, a Regional Rural Bank, a co-operative bank and any charitable or educational institution notified in that behalf by the State Government in consultation with the Reserve Bank of India.
5 There is no general provision which empowers the Central Government or the Reserve Bank of India to exempt any other prize chit or money circulation scheme from the applicability of the Act. In exercise of its powers under Section 13 of the Act the Government of West Bengal has made the Prize Chits and Money Circulation Scheme (Banning) (West Bengal) Rules, 1979.
The Miscellaneous Non-Banking Companies (Reserve Bank) Directions 1977 and the Non-Banking Financial Companies (Reserve Bank) Directions came into force on July 1, 1977.
On March 3, 1978 the Reserve Bank informed the Peerless Company that under the Miscellaneous Non-Banking Companies Directions which applied to the Company, the Company was prohibited from accepting deposits for more than 36 months and since the deposits accepted by the Company were for periods exceeding 36 months, the Reserve Bank wanted to know what action the Company proposed to take to comply with the requirement stipulating the maximum period for which deposits might be accepted. In reply, the Company, by its letter dated 31st March, 1978, pointed out the special features of the Company which persuaded the Reserve Bank to grant exemption to the Company from the 1973 directions. The Company invited the attention of the Reserve Bank of the various elements of the scheme which made it impracticable to comply with the stipulation regarding the maximum period of 36 months as that would make the scheme wholly unviable. The Company requested that further exemption may be granted in the public interest. The alternative, it was said, would be to close the business and that would mean loss of employment to several thousands of employees and financial loss to millions of depositors. The Company suggested that the Reserve Bank might recommend to the Central Government to convert the undertaking into a joint-sector enterprise. The letter ended with an appeal to the Reserve Bank to grant exemption from the restrictions relating to maximum period.
By its letter dated July 23, 1979, the Reserve Bank pointed out to the company that the schemes conducted by the Company were covered by the provisions of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 which had come into force with effect from December 12, 1978. As the Company was banned from doing fresh business and was required to wind up its existing business under the Act, there was no question of granting any exemption to the company. Nevertheless the Reserve Bank stated that they had considered the claim for exemption on merits and found that it was necessary to cancel the exemption already granted. The reasons for the proposed cancellation were set out and the Company was asked to show cause why the exemption should not be cancelled. On August 30, 1979 6 the Company replied at great length stating how necessary it was in the public interest to grant exemption to the Company. On August 10, 1979, the Government of West Bengal addressed a communication to the Peerless Company pointing out that the Prize Chits/Money Circulation Schemes conducted by the Company came within the purview of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 and, therefore, the Company was under an obligation to submit a winding up plan under Rule 4 of the Prize Chits and Money Circulation Schemes (Banning) (West Bengal) Rules, 1979.
On September 3, 1979, the Company filed a writ petition in the Calcutta High Court for a declaration that the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 did not apply to the business carried on by the company. A Rule was issued and an Interim Order was made in favour of the company, first for a limited period and, later, till the disposal of the writ petition. 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 Rule and Interim Order were issued.
During the pendency of the writ petition exemption was refused by the Reserve Bank on 19.3. 1980.
Appeals preferred by the company under the Letters Patent against the judgment of the Single Judge were allowed. It was declared that the business carried on by the company did not come within the mischief of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. 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 have preferred Civil Appeal Nos.3562, 3563, 3564, 3565 and 4459 of 1986. In the course of the judgment, the Division Bench of the Calcutta High Court had observed that the company was a financial institution within the meaning of paragraph 11 of the Non-Banking Financial Companies (Reserve Bank) Directions, 1977 and therefore, the Directions contained therein applied to the business carried on by the company. Against this observation of the Division Bench, the Company has also preferred Civil Appeal Nos. 3566 and 3567 of 1986. After the judgment of the Division Bench of the Calcutta High Court, the Company, pursuant to the observations of the Division Bench that it was a financial institution within the meaning of paragraph 11 of the NonBanking Financial Companies Directions, applied afresh to the Reserve Bank of India for exemption from complying with the Directions. The Reserve Bank of India by its order dated August 22, 1986 refused to grant the exemption sought. The company has filed another writ petition in the Calcutta High Court against the said refusal by the 7 Reserve Bank to grant exemption. Therefore, the court preferred to apply "Non liquet" on the question whether the company is a financial Institution within the meaning of para 11 of the Non-Banking Financial Companies (Reserve Bank) Directions.
Dismissing the appeals of Reserve Bank of India. Union of India and the State of West Bangal, the Court.
HELD: Per Chinnappa Reddy, J.
1. 1 Legislatures resort to inclusive definitions
(i) to enlarge the meaning of words or phrases so as to take in the ordinary, popular and natural sense of the words and also the sense which the statute wishes to attribute to it;
(ii) to include meanings about which there might be some dispute; or
(iii) to bring under one nomenclature all transactions possessing certain similar features but going under different names. Depending on the context, in the process of enlarging, the definition may even become exhaustive.
By using the word, the Legislature did not intend to so expand the meaning of prize chit as to take in every scheme involving subscribing and refunding of money. The word "includes", the context shows, was intended not to expand the meaning of "prize chit" but to cover all transactions or arrangements of the nature of prize chits but under different names. The expression "Prize chit" had nowhere been statutorily defined before. The Bhahatosh Datta Study Group and the Raj Study Group had indentified the schemes popularly called "Prize Chits". The Study Group also recognised that "Prize Chits" were also variously called benefit/savings schemes and lucky draws and that the basic common features of the schemes were the giving of a prize and the ultimate refund of the amount of subscriptions (vide para 6.3 of the report of the Raj Study Group). It was recommended that prize chits and the like by whatever name called should be banned. Since prize chits were called differently, "prize chits" benefit/ savings schemes, "lucky draws", etc. it became necessary for the Parliament to resort to an inclusive definitions so as to bring in all transactions or arrangements containing those two elements. In defining the expression "prize chit" the Parliament did not intend to depart from the meaning which the expression had come to acquire in the world of finance, the meaning which the Datta and the Raj Study Groups had given it. [42D-H;43A-B]
1.2 Interpretation must depend on the text and the context. They are the bases of interpretation. One may well say if the text is the texture, context is what gives the colour. Neither can be ignored. Both 8 are important. That interpretation is best which makes the textual interpretation match the contextual. A statute is best interpreted when the object and purpose of its enactment is known. With this knowledge, the statute must be read, first as a whole and then section by section, clause by clause, phrase by phrase and word by word. If a statute is looked at, in the context of its enactment, with the glasses of the statute maker, provided by such context its scheme, the sections, clauses, phrases and words may take colour and appear different than when the statute is looked at without the glasses provided by the context. With these glasses the court must look at the Act as a whole and discover what each section, each clause, each phrase and each word is meant and designed to say as to fit into the scheme of the entire Act. No part of a statute and no word of a statute can be construed in isolation. Statutes have to be construed so that every word has a place and everything is in its place. It is by looking at the definition as a whole in the setting of the entire Act and by reference to what preceded the enactment and the reasons for it that the court construed the expression "Prize Chit" in Srinivasa. [43B-F]
1.3 Therefore, the two requirements mentioned in the two clauses (i) and (ii) of the definition are not to be read disjunctively; they are two distinct attributes of "Prize Chits", each of which has to be satisfied. The Conventional Chit satisfies both the requirements of the definition of "Prize Chit", since it involves both the "certain" and the "chance" elements, the certain element being the refund of the amount of subscriptions less the deductions and the chance element being the time of such payment, dependent on the result of the draw or auction. Yet the definition of "Prize Chit" expressly excludes the Conventional Chit obviously for the reason that the "chance" element is overshadowed by the "certain element". If so, no construction may be placed on the definition so as to bring in all Recurring Deposit Schemes, even if they do not involve a chance element. Such a construction would reduce the definition to a near absurdity and render the reference to the giving or awarding of a prize or girl, a meaningless superfluity. If a conventional chit is not a "Prize Chit" by definition there appears to be no logic in construing the definition to include a Recurring Deposit Scheme. [43H;44A-D]
2. The argument that the two clauses (i) and (ii) are to be read disjunctively and that they should not be read as if they are joined by the conjunction "and" cannot be accepted.
There is no need to introduce the word "or" either. How clauses (i) and (ii) of s.2(e) have to be read depends on the context. The context requires the definition to be read as if both clauses are satisfied. There is nothing in the text which 9 makes it imperative that it be read otherwise. Each of the clauses (i) and (ii) contains a number of alternatives and it is to those several alternatives that the expression "all or any of the following purposes" refers and not to (i) or (ii) which are not alternatives at all. In fact, a prize chit, by whatever name it may be called, does not contemplate the exhaustion of the entire fund by the giving of prizes; it invariably provides for a refund of the amount of subscription, less the deductions, to all the subscribers or to those who have not won prizes, depending on the nature of the scheme. Clauses (i) and (ii) refer to the twin attributes of a prize chit or like scheme and not to two alternate attributes. [44D-G]
2.2 While it is possible to say that Parliament desired to root out prize chits and schemes of like nature involving the vicious element of gambling, it is inconceivable that Parliament intended to visit even subscribers to Recurring Deposit Schemes involving no such vice with such dire consequence. Therefore, section 2(e) of the Act does not contemplate a scheme without a prize, and therefore, the endowment certificate scheme of the Peerless Company is outside the Prize Chits and Money Circulation Scheme (Banning) Act, 1978. [45A-B;E] Srinivasa Enterprise v. Union of India, [1981] 1 SCR 801; Ardeshir Bhiwandiwala v. State of Bombay, [1961] 3 SCR 692; C.I.T. Andhra Pradesh v. Taj Mahal Hotel, [1972] 1 SCR 168; and S.K. Gupta v.K.P. Jain, [1979] 4 SCC 54, referred to.
3. Despite Articles 38, 39, 41 and 43 of the Constitution the Life Insurance Corporation of India, an instrumentality of the State, which is given the monopoly of Life Insurance business in the country has taken no steps to offer proper security and protection to the needy, poor, rural folk. If the Life Insurance Corporation is really interested in the treating the poorer policy-holders less harshly and more liberally the time has come for the Life Insurance Corporation to revise its terms and conditions and to think in the direct/on of deleting the forfeiture clause altogether as has now been done by the Peerless Company or to delete it at least from life policies for small amounts.
Perhaps the Life Insurance Corporation may think of short term, small amount policies with no forfeiture clause and with some incentive such as a reduced premium for continuing to pay premiums regularly. It is hoped, with the management expertise at its command, the Life Insurance Corporation of India can devise a myriad ways of serving the poorer sections of the people of our country, as also to tap the huge untapped Savings resources, the existence of which has been brought home by companies like the Peerless however wrong headed their business methods might 10 be. It is a matter of common knowledge that the return to a policyholder who survives the period of the policy is very poor. It may be true that the Life Insurance Corporation is paying higher bonus year after year but the bonus comes out of the amounts of the forfeited policies and it means that it is really the poor class of policy holders whose policies are forfeited that are paying bonus to the class of policyholders who are better off. This surely is not what is contemplated by Art. 38(2) of the Constitution which talks of minimising the inequalities in income, not only amongst individuals but also amongst groups of people and Art. 39(c) which requires the State to secure that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment.
[18F-H; 19A-D] Per Khalid, J.
A close study of the definition makes the conclusion inescapable that the Peerless scheme does not come within it. Any attempt to bring the activities of the Peerless within the definition has only to fail. It would not be proper to refer to the observations in the judgment, in Srinivasa's case, on section 2(e) of the Act either as obiter or per incuriurn. [11G] When the activities of the Peerless and the Life Insurance Corporation are considered juxtaposed, one is tempted to observe that Peerless is less harsh than the Life Insurance Corporation. The Life Insurance Corporation enjoys many privileges. It has a duty to be above suspicion. It has a duty to serve people in the right manner. The Life Insurance Corporation should at least in future be liberal and generous when claims are made by those unfortunate few, who when robbed of their bread earners claim for the insured amount and who are invariably met on technical pleas of concealment of ailment and the like. The Life Insurance Corporation does not come out with glory when some of its dealings are considered. [12B-D]
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 3562 & 3563 of 1986 etc.
From the Judgment and order dated 23-5-86 of the Calcutta High Court in F.M.A.T. No. 824 and 825/86 K. Parasaran, Attorney General, G. Rama Swamy, Additional Solicitor General, S..Roy Chowdhary, Som Nath Chatterjee, S.N. Kacker, A.K. Ganguli, Sankar Ghosh, N.N. Gooptu, T.K. Banner11 jee, A.K. Sil, H.S. Parihar, A. Mitra, G. Joshi, S. Roy, A. Subba Rao, P. Parmeshwaran, Bhaskar Gupta, P. Basu, A. Chatterjee, B. Lehari, S. Sukumaran, Dilip Sinha, J.R. Das, K.R. Nambiar, H.K. Puri, P.K. Pillai, S.K. Jain and J.R. Das for the appearing parties.
The Judgments of the Court were delivered:
following KHALID, J. I agree with my learned brother in his conclusion. However, I would like to add that short post-script of my own.
In the main Judgment the sinister aspects of the Peerless scheme have been brought out in great detail as well as the improvements attempted. What disturbed me most was the plight of the innumerable subscribers who lose their money by the operation of the scheme under consideration. When I say this, I feel concerned of those situated far and wide in the remote villages of the country, uninitiated into the mysteries of financial schemes, who are lured by the promises of easy money and decide to pay the first instalment by the encouraging words of the agents, who forget them thereafter, because of the disincentive commission they get after the first instalment is paid, who, therefore, do not pursue these depositors to make subsequent deposits promptly. It is some consolation that the Peerless is trying to bring in reforms to reduce some of the vicious aspects of its scheme.
While referring to the plight of the depositors I do not at the same time ignore the large number of employees employed by the company.
The only reason why the appeals are being dismissed is on the wording of Section 2(e) of the Act. A close study of the definition makes the conclusion inescapable that the Peerless scheme does not come within it. Any attempt to bring the activities of the Peerless within the definition has only to fail. This position gets support from two Judgments rendered by benches of three Judges of this Court viz., Srinivasa Enterprises and others v. Union of India etc., [1981] 1 SCR 80 1 and State of West Bengal v. Swapan Kumar Guha., [1982] 1 SCC 561. Any attempt to distinguish the ratio of these two cases for the purpose of these appeals cannot succeed. In the case of Srinivasa Enterprises this Court was considering the identical section. I do not think it would be proper to refer to the observations in this Judgment on this section either as obiter or per incurium. The position canvassed before us thus strictly is not res-integra and is covered by these two Judgments, more particularly in Srinivasa Enterprises.
Life Insurance Corporation is not a party before us. But its 12 activities in certain spheres were brought to our notice by the learned counsel for the appellants. The Reserve Bank of India is the main appellant. The Union of India and the State of West Bengal have in tandem supported the Reserve Bank of India against the Peerless. When the activities of the Peerless and the Life Insurance Corporation are considered juxtaposed, one is tempted to observe that Peerless is less harsh than the Life Insurance Corporation. The Life Insurance Corporation enjoys many privileges. It has a duty to be above suspicion. It has a duty to serve people in the right manner. I am constrained to observe from my experience, that I have found the Life Insurance Corporation heartless whenever claims are made against it. I fully agree with the observations made by my learned brother regarding some of the aspects of the Life Insurance Corporation schemes. I wish only to emphasise that the L.I.C. should at least in future be liberal and generous when claims are made by those unfortunate few, who when robbed of their bread earners claim for the insured amount and who are invariably met on technical pleas, of concealment of ailment and the like. The Life Insurance Corporation does not come out with glory when some of its dealings are considered. I do not think it would be proper to make more harsh reference about the Life Insurance Corporation when it is not a party before us. 1 felt it necessary to make these observations, with utmost restraint, since an opportunity afforded itself in this case.
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.
CHINNAPPA REDDY J. The question is "Is a prize-less chit a prize chit?" So posed the answer appears to be selfevident. That is what it is in the ultimate analysis.
'The Peerless General Insurance & Investment Co. Ltd.' was incorporated in 1932. After the nationalisation of the business of life insurance the name of the company was changed to 'the Peerless General Finance & Investments Co. Ltd.' For over a quarter of a 13 century now, the business of the company has been that of 'finance & investment'. The company offers three schemes, the principal of which is the Endowment Certificate Scheme.
Under this scheme, a subscriber is required to pay a fixed annual subscription for a fixed number of years varying between the minimum of 10 years and the maximum of 30 years.
On the expiry of the period, the subscriber will be paid by the company a sum of money called the Endowment Sum which is the face value of the Certificate. The subscriber is also entitled to be paid a guaranteed fixed bonus. For example, an annual subscription of Rs.77 for 10 years will fetch the subscriber at the end of the 10 year period a sum of Rs. 1,000 as endowment sum and a sum of Rs. 100 as bonus, making a total of Rs. 1,100. If any instalment, that is, any amount of annual subscription is not paid within the stipulated period and period of grace, the Certificate lapses unless it has acquired a surrender value. A Certificate acquires surrender value after the expiry of three years from the date of commencement if the subscription for two full years has been paid. A Certificate which has not acquired surrender value lapses on non-payment of instalments and the amounts paid become forfeit to the company. A lapsed certificate may, however, be revived at any time before the expiry date of maturity on payment of all dues together with interest at one paisa per rupee per month. There is also provision in the scheme for conversion of the Certificate into a paid up Certificate, the paid up amount to be paid at the end of the period, but without bonus. A person purchasing a Certificate automatically becomes entitled to a free accident insurance policy under a group insurance scheme.
A noticeable feature of the scheme is the remarkably low yield to the subscriber on his investment. In the example that we gave we said a subscriber investing Rs.77 every year for ten years will get, at the end of the tenth year, a return of Rs. 1000 by way of 'Endowment Sum' and Rs. 100 as bonus. Treating the total sum of Rs. 1,100 as the amount which the investor gets back on his ten-year annual investment of Rs.77, the yield on his investment works out at compound interest of about 6% or simple interest of a little over 7%. This is on the assumption that he does not commit default but pays his annual subscription regularly. But consider what happens to the investments of those who commit default; a subscriber who defaults in payment of annual subscription after payment of the first subscription, forfeits the subscription previously paid by him. A subscriber who pays the first two subscriptions but commits default thereafter is entitled to have a refund of the subscriptions paid by him but only at the end of the full endowment period. That is to say, the amount invested by the subscriber upto the 14 time of default will be with the company, earning interest for the company but nothing for the subscriber himself. The subscriber who commits default after payment of two annual subscriptions is entitled to have the surrender value paid to him after the expiry of three years from the date of commencement. The surrender value is 90% of the subscriptions paid by him excluding the first year's subscription.
In other words, if a subscriber who commits default after payment of two subscriptions opts for immediate payment after three years he forfeits his first year's subscription and 10% of the subsequent years' subscription. On the other hand, if he opts for payment at the end of endowment period he will get a refund of the subscriptions paid by him but without interest and without bonus. If he commits default after paying three years' subscription but opts for payment at the end of the Endowment period he will get back a proportionate part of the Endowment Amount and this without bonus. The yield will be very much lower than the 6% compound interest or 7% simple interest that we mentioned earlier. The subscriber is always at the losing end. It is a perfect case of 'Heads I win, tails you lose'.
At this stage, it may be useful to refer to the business practices and the working results of the company. The company advertises its schemes widely in beguiling terms. The public are told, "The schemes are open to any person of Indian Nationality without any restriction of caste, creed, sex, age or health, excepting physical disabilities, such as, loss of limbs, dumbness, deafness, or blindness". They are further told, "Investment under the Schemes is highly profitable and the return is sure and guaranteed by the Company. There is no element of uncertainty in the matter";
"the terms and conditions of the Certificate are simple, liberal and attractive" ,"No trouble of Medical Examination"; "Unique advantage of saving as well as earning decent profit" etc. A virtual publicity blitz is carried on in the daily and weekly newspapers: "Peerless-an epitome of absolute security", "Save for your dear ones", "Savings through Peerless means savings for the progress of the Nation", "Peerless team works today for India's happy tomorrow", "Save through peerless for national welfare", "Peerless the choice of the millions" etc.
The message of Peerless is made to penetrate the rural areas to tap the small savings of the poor ignorant villagers through a special structure of agents, special agents, sub-organizers, organizers, special organizers and so on.
This field staff appears to be chosen for their social, political or official connections. What is of significance is that an agent's commission is 30% of the first year's subscription and 5% 15 only of subsequent years' subscriptions. Straightaway, this offers an incentive to the agents to concentrate on securing fresh business and a disincentive to collect subscriptions of subsequent years. It is common experience and common knowledge that most rural folk particularly those belonging to the poorer sections of people will not pay ,their subscription regularly unless somebody takes the trouble of collecting their subscriptions from them showing the same enthusiasm in doing so as was shown in enrolling subscribers and collecting the first subscription. The incentive of 30% of the collection of the subscription of the first year automatically operates as a disincentive for collecting subscriptions of subsequent years. The results show it and perhaps it is intended to be so. As we have already seen, default after the payment of the first subscription results in forfeiture of the first year's subscription. The first subscription is literally shared between the company and its agents and one need not wonder that under the method of accountancy adopted by the Company it is treated as income and not as a liability of the company. We are told that the company has adopted the 'actuarial' system of accountancy followed by the Life Insurance Corporation. Though we note here that the business of the Life Insurance Corporation is insurance business and therefore different from the business of the company, we will have more to say about the policies of the Life Insurance Corporation a little later. For the present we note that the company does not and cannot carry on any insurance business and that it accepts no risk.
Let us now take a brief look at the result of the attractive incentive given to the agents to collect the first year's subscription. A compilation prepared by the Reserve Bank of India which is found at page 457 of the paper book shows that the first year's subscription credited to the profit and loss account during the years 1978, 1979, 1980, 1981, 1982, 1983, and 1984 was 17, 16, 27.59, 48.07, 85.70, 129.23, 129.50 and 126.47 lakhs, while the commission paid to the field force during those years was 13.23, 21.73, 39.07, 69.82, 95.21, 95.17 and 93.92 lakhs respectively and the renewal subscription collected during the years was 12.50, 15.95, 22.32, 33.34, 57.79, 80.35 and 101.40 lakhs respectively.
The striking fact that stares at us is that out of the total deposits collected during the years 1978 to 1984 amounting to Rs.887.37 lakhs, a sum of Rs.563.72 lakhs represents collections of first year subscriptions and 323.65 lakhs represents subsequent years' collections. First subscriptions far outweigh renewal subscriptions. This feature almost becomes sinister if we remember that the renewal subscriptions relate 16 not to a single year's certificates but to certificates issued during the 10,20,30 years periods previous to the very relevant year corresponding to 10,20,30 year certificates as the case may be. This clearly indicates that the majority of the subscribers commit default after the first year and only a few of the depositors continue their subscriptions and keep alive the certificates. This gives us an indication as to the class of depositors who are principally contacted and are perhaps intended to be so contacted.
Having regard to the class of depositors and the incentives offered to agents for securing fresh business, neglect and default of renewal subscriptions is an inevitable result.
The agents are interested in securing fresh business because of the High rate of commission in regard to fresh business and are loath to waste their time on collecting subsequent years' subscriptions fetching far less commission.
We are told that the terms of the scheme have now been revised and the forfeiture clause has been altogether deleted with the result that even a subscriber who commits default after the first year's subscription becomes entitled to get a refund of the amount at the end of the endowment period. While this may be an improvement on the original scheme, we find that agents are even now entitled to a commission of 35% of the first year's subscription. This continued incentive for fresh business will naturally lead to the same result as before, that is, it will encourage agreements to continue to concentrate on collecting first year's subscriptions to the total neglect of subsequent years' subscriptions.
At this point we may refer to one of the schemes marketed by the Life Insurance Corporation of India which appears to be familiarly known in circles connected with deposit schemes as 'Table No. 21 Policy'. We are referring to this policy as it was argued before us that the endowment scheme of the Peerless Company is better conceived in the interests of the investors than the 'Table No. 21 Policy' of the Life Insurance Corporation and yet no one has thought of stopping the Life Insurance Corporation of India from marketing the Policy. For a better appreciation of the submissions which we will consider at a later stage, we desire to set out the details of the Policy at this juncture itself in order to compare it with the Endowment Scheme of the Peerless Company. Two things have to be straightaway noticed, first, the 'Table No. 21 Policy' offered by the Life Insurance Corporation is not a life Insurance policy, as we generally know it, second, it is a policy without profits. Under this policy no one need undergo medical examination and no one would be unacceptable for reasons of health only.
17 These two features are common to the Peerless Endowment Scheme and the 'Table No. 21 Policy'. Under the Policy the sum assured is payable on the policy holder's surviving the endowment term. No bonus is payable. To secure payment of a sum of Rs. 1,000 at the end of 10 years, the annual premium to be paid is of Rs.83.90. If the policy holder dies during the first year of the policy 80% of the amount of the premium will be paid to the heirs. If he dies during the second year of the policy 90% of all the premiums will be paid. If he dies during the third year of the policy, the total amount of all the premiums will be paid. If the death occurs after the third policy-year the total amount of all the premiums paid together with compound interest at 21/2 % will be paid. If a person commits default in payment of premiums after the expiry of three years, having paid the full premiums in the meanwhile, the policy becomes automatically paid up for a reduced amount bearing the same ratio to be assured sum as the number of premiums paid bears to the total number stipulated in the policy. If default is committed within the first three policy years, the amounts of premium paid are forfeited. We do not have the slightest doubt that the terms of the 'Table No. 21 Policy' of the Life Insurance Corporation are very stringent and much more to the disadvantage of the subscriber than the terms of the endowment scheme of the Peerless Company. We are told that the scheme is primarily devised to enable the subscribers to get tax-benefits under various fiscal enactments. Whetever it is, it is certainly not intended to tap the savings of the rural poor nor is it designed to benefit them. In fact, we find on an examination of some of the Life Assurance Schemes, which we were invited to do by the learned counsel, that the terms of the policies are heavily loaded against the poorer policy holders. The Manual for Agents describes the Endowment Assurance Policy (Tables 11, 14, 47 and 48) as the most popular form of Life Assurance as it is supposed to make 'provision for the family of the Life Assured in the event of his early death' and also 'assures a lumpsum at any desired age'. Now, under this Policy, if payment of the annual premium ceases after at least three years' premiums have been paid, a free paidup Policy for an amount bearing the same proportion to the sum assured as the number of premiums actually paid bears to the total number stipulated in the Policy, will be automatically secured. The amount, of course, will be payable at the end of the Endowment period only. What is important is that if the Policy-holder commits default and does not pay any one of the first three premiums the premiums already paid automatically stand forfeited to the Life Insurance Corporation, entitling the Policyholders to no benefit. Since it is the poorer class of Policy-holders that may ordinarily be expected to commit default in payment of 18 premiums, the forfeiture clause, in practice, operates harshly, specially against that class, the very class which requires greater security and protection. A perusal of the 'Report and Accounts', of the Life Insurance Corporation for the years ending March 31, 1983 and March 31, 1985 which have been placed before us shows that while 22,31,385 and 26,99,654 new policies were issued respectively during the two years the number of policies which lapsed or were forfeited were respectively 74,44,22 and 82,71, 19. Thus the number of policies which lapse or are forfeited are roughly thirty percent the number of new policies issued during a year. An analysis of the lapsed and forfeited policies is also given in the Reports. From the report for the year ending March 31, 1983, we see that out of the 74,44,22 lapsed and forfeited policies, 43,70,04 were issued in the first year previous to the year under review, 1,98,949 in the 2nd year previous to the year under review and 83950 in the 3rd year previous to the year under review. From the report for the year ending March 31, 1985, we see that out of the 82,71, 19 lapsed and forfeited Policies, 46, 19,80 were issued in the first year previous to the year under review, 23,59,94 were issued in the second year previous to the year under review and 99,589 in the third year previous to the year under review. We also notice that in the policies issued earlier than the third year before the reviewed year lapses or forfeitures were negligible. Thus we notice that the incidence of lapsing or forfeiture of policies is highest and of a high order in the first three years after a policy is issued. It does not require much imagination to see that the victims of the forfeiture clause in the policies are bound to be persons belonging to the poorer sections of the people. It does not appear that any special efforts are made by the Life Insurance Corporation to persuade the poorer policy-holders not to allow their policies to lapse or be forfeited 'after paying one, two or three premiums. The incentives to agents appear to be for securing fresh business and not for continuing old policies.
We cannot help but feel distressed that despite Arts. 38, 39, 41 and 43 of the Constitution, the Life Insurance Corporation of India, an instrumentality of the State, which is given the monopoly of Life Insurance business in the country has taken no steps to offer proper security and protection to the needy, poor, rural folk. If the Life Insurance Corporation is really interested in treating the poorer Policy-holders less harshly and more liberally the time has come for the Life Insurance Corporation to revise its terms and conditions and to think in the direction of deleting the forfeiture clause altogether as has now been done by the Peerless Company or to delete it at least from policies for small amounts. Perhaps the Life Insurance Corpora19 tion may think of short term, small amount policies with no forfeiture clause and with some incentive such as a reduced premium for continuing to pay premiums regularly. We are sure that with the management expertise at its command the Life Insurance Corporation of India can devise a myriad ways of serving the poorer sections of the people of our country, as also to tap the huge untapped Savings resources, the existence of which has been brought home by Companies like the Peerless however wrong headed their business methods might be. It is a matter of common knowledge that the return is a policy-holder who survives the period of the policy is very poor. We are now told daily that the Life Insurance Corporation is paying higher bonus year after year. But the learned counsel for Peerless charges that the bonus comes out of the amounts of the ferfeited policies and that it is really the poorer class of defaulting policy-holders whose policies are forfeited that are paying bonus to the class of Policy-holders who are better of. One wonders if this is not so This surely is not what is contemplated by Art. 38(2) of the Constitution which talks of minimising the inequalities in income, not only amongst individuals but also amongst groups of people and Art. 39(c) which requires the State to secure that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment.
In 1964, by Central Act No. 55 of 63 the Reserve Bank of India Act was amended by the addition of Chapter III (B) consisting of Sections 45H to 45Q. The title of the chapter is "Provisions relating to Non-Banking Institutions receiving deposits and Financial Institutions." Section 45I(c) defines Financial Institution as follows:"'Financial Institution' means any non-banking institution which carries on as its business or part of its business or any of the following activities, namely:(i) the financing, whether by way of making loans or advances or otherwise, of any activity other than its OW I1:
(ii) the acquisition of shares, stock, bonds, debentures or securities issued by a Government or local authority or other marketable securities of a like nature;
(iii) letting or delivering of any goods to a hirer under a hire-purchase agreement as defined in clause(c) of section 2 of the Hire-Purchase Act, 1972;
20 (iv) the carrying on of any class of insurance business;
(v) managing, conducting or supervising, as foreman, agent or in any other capacity, of chits or kuries as defined in any law which is for the time being in force in any State, or any business, which is similar thereto;
(vi) collecting, for any purpose or under any scheme or arrangement by whatever name called, monies in lumpsum or otherwise, by way of subscriptions or by sale of units, or other instruments or in any other manner and awarding prizes or gifts, whether in cash or kind, or disbursing monies in any other way, to persons from whom monies are collected or to any other person;
but does not include any institution, which:
(i) is an industrial concern as defined in clause(c) of section 2 of the Industrial Development Bank of India Act, 1964, or
(ii) carries on as its principal businees :-
(a) agricultural operations; or
(b) the purchase or sale of any goods (other than securities) or the providing of any services; or
(c) the purchase, construction or sale of immovable property, so, however, that no portion of the income of the. institution is derived from the financing of purchases, constructions or sales of immovable property by other persons;
(d) "firm" means a firm as defined in the Indian Partnership Act, 1932;
(e) "non-banking institution" means a company, corporation, (or co-operative society)" Section 451(e) defines 'Non-Banking Institution' as meaning 'a company, corporation, or co-operative society'.
Section 45K empowers the Reserve Bank to collect information from Non-Banking Institutions as to deposits and to give directions in the public interest, 21 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.' Section 45L empowers the Reserve Bank to call for information from financial institutions and to give directions, in particular directions relating to the conduct of business by them, etc.
In 1970 the Banking Commission constituted a Study Group headed by Dr. Bhabatosh Dutta to review the role of various nonbanking financial intermediaries. The Study Group confined their study to five classes of Finance Institutions which they considered were important Non-Banking Financial Institutions. They were:1. Hire Purchase Finance Institutions;
2. Investment Companies;
3. Chit Funds/Kuris;
4. Nidhis or Mutual Benefit Funds; and 5. Finance Corporations.
Proceeding to consider Chit Funds and their working, the Study Group identified three classes of Chit Funds: (a) Simple Chits, (b) Prize Chits and (c) Business Chits. The main features of the three classes of Chits were then described in the following terms:"(a) Simple Chits In the 'simple chit', members agree to contribute to the fund a certain amount at regular intervals. Lots are drawn periodically and the member whose name appears on the 'chit' gets the periodical collection. His name is then removed from the subsequent lots;
he, however, has to continue to pay his subscriptions. Thus, every member gets the whole of the chit amount by tums. There is no loss of capital. Also there is no foreman or even if there is one he does not charge any commission. This is a form of mutual help and cooperative effort at savings.
(b) Prize Chits In the 'prize chit', there is a foreman who ostensibly charges no commission and promises to return the whole of 22 the contributions made by a member back to him at the end of a certain period. Periodically, the names of 'non-prized' members are put to draw and the lucky member gets the prize either in cash or in the form of an article of jewellery or utility. Once a person gets a prize, he does not have to pay further instalments. The lucky member will get the prize irrespective of the number of instalments he has paid provided all the due instalments till the drawal of prize have been paid;
he will then be exempted from further liability to pay. On the contrary the majority of the mem bers may not have got the prize when the scheme closes though they get back their total contributions without any deduction or its equivalent in the shape of an article. This is a scheme which is nothing short of a lottery which is an offence punishable under Section 294-A of the Indian Penal Code. The name 'Chit Fund' is rather a misnomer in this case.
(c) Business Chits In this case, there is a promoter called foreman who enrols a number of subscribers and draws up the terms and conditions of the scheme in the form of an agreement. Every subscriber has to pay his subscription in regular instalments. The foreman charges, for his service, a com mission on which there is a ceiling fixed by law in some States. He also reserves the right to take the entire chit amount at the first or second instalment as prize.
Depend ing on the terms of agreement, a fixed amount is also sometimes set aside for distribution among the non-prized members. After making provision for the above deductions the balance is put to auction (except at the last instalment) and given as prize to the member who is prepared to forgo the highest discount. The amount of discount is distributed as dividend either among all the members or only among the non-prized members. In some States a ceiling has been fixed on the discount that a member can offer. In case more than one person is prepared to offer the same discount or when there are no bidders, lots are drawn to choose the prize winning member.
The number of subscribers in a chit series equals the number of instalments so that every member is assured of the opportunity of getting the prize. Sometimes with a view to catering to as many subscribers as 23 possible a chitty comprises a series expressed in terms of a sub-division or fraction of a full ticket (ticket means the share of a subscriber which entitles the holder thereof the prize amount at any one instalment). In such cases the number of subscribers can exceed the number of instalments. In some cases only auctions are held to determine the prize winner while there are chit funds in which prize winning tickets are determined both by lots and by auction".
The Study Group's view was that Chit Funds were not efficient as saving or lending institutions and that they encouraged consumption spending and in some cases hoarding of scares commodities. The major reason of their popularity was stated to be ignorance of the risk and the disadvantages involved. The ultimate solution, they said, lies in Commercial Banks weaning away the Chit Fund subscribers by offering attractive deposit and credit schemes. In the meanwhile, it was suggested that elimination of Chit Funds would leave credit gap and therefore, they should be regulated by appropriate legislation to ensure safeguarding the interest of members and prevent the foreman from enjoying the wide powers that they did at that time.
Shortly after the report, the Reserve Bank of India purporting to exercise its powers under ss.45J and 45K of the Reserve Bank of India Act gave certain directions called "Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1973". Paragraph 2 of the directions stated: "Extent of the Directions:
These directions shall apply to every non banking institution, which is a company, not being a banking or an insurance company, and which carries on any of the following types of business:(1) collecting whether as a promoter, foreman, agent or in any other capacity, monies in one lump sum or in instalments by way of contributions, or subscriptions or by sale of units, certificates or other instruments or in any other manner or as membership fees or admission fees or service charges to or in respect of any savings, mutual benefit, thrift, or any other scheme or arrangement by whatever name called, and utilising the monies so collected or any 24 part thereof or the income accruing from investment or other use of such monies for all or any of the following purposes-
(a) giving or awarding periodically or otherwise to a specified number of subscribers as determined by lot, draw or in any other manner, prizes or gifts in cash or in kind, whether or not the recipients of the prize or gift is under a liability to make any further payment in respect of such scheme or arrangement;
(b) refunding to the subscribers or such of them as have not won any prize or gift,, the whole or part of the subscriptions, contributions, or other monies collected, with or without any bonus, premium, interest or other advantage, howsoever called, on the termination of the scheme or arrangement, or, on or after the expiry of the period stipulated therein;
(2) managing, conducting or supervising as a promoter, foreman or agent of any transaction or arrangement by which the company enters into an agreement with a specified number of subscribers that every one of them shall subscribe a certain sum in instalments over a definite period and that every one of such subscriber shall in his turn, as determined by lot or by auction or by tender or in such other manner as may be provided for in the agreement, be entitled to the prize amount;
Explanation:
For the purposes of this sub-paragraph, the expression "prize amount" shall mean the amount, by whatever name it be called, arrived at by deduction from out of the total amount subscribed at each instalment by all subscribers, (a) the commission charged by the company as service charges as a promoter or a foreman or an agent, and (b) any sum which a subscriber agrees to forego, from out of the total subscriptions of each instalment, in consideration of the balance being paid to him.
(3) conducting any other form of chit or kuri which is different from the type of business referred to in sub-paragraph (2) above;
25 (4) undertaking or carrying on or engaging in or executing any other business similar to the business referred to in sub-paragraphs(1) to (3)." Paragraph (3)(1)(i) defined a 'Miscellaneous Non-Banking Company' as meaning a company carrying on any of the types of business referred to in paragraph 2 of the directions.
Paragraph 4 dealt with acceptance of deposits by Miscellaneous Non-Banking Companies. Paragraph 4(a) prescribed six months as the minimum period for which a Miscellaneous Non-Banking Company could accept a deposit, but no maximum period was prescribed. Paragraph 4(b)(ii) prescribed a ceiling of 25% of the aggregate of the paid up capital and free reserve of the company in the case of deposits accepted by Miscellaneous Non-Banking Companies. Paragraph 13 enabled the Reserve Bank to exempt any company or class of companies from, all or any of the provisions of the directions either generally or for a specified period, if it considered necessary for avoiding any hardship or for any other just and sufficient reason.
The Reserve Bank of India issued a circular letter bringing the directions to the notice of companies like Peerless. On September 14, 1973, the Peerless Company addressed a letter to the Reserve Bank of India explaining the nature of their business and claiming that their business was outside the scope of the directions issued by the Reserve Bank. Most important of all, it was requested that, if it was thought that the