Peerless General Finance and Investmentco. Ltd. & ANR Vs. Reserve Bank of India [1992] INSC 33 (30 January 1992)
1992 Latest Caselaw 33 SC

Peerless General Finance and Investment Co. Ltd. & Anr Vs. Reserve Bank of India [1992] INSC 33 (30 January 1992)

Kasliwal, N.M. (J) Kasliwal, N.M. (J) Ramaswamy, K.

CITATION: 1992 AIR 1033 1992 SCR (1) 406 1992 SCC (2) 343 JT 1992 (1) 405 1992 SCALE (1)216

ACT:

Reserve Bank of India Act, 1934:

Sections 45K (3), 45J, 45I & 45L: Residuary Non-Banking Companies-Receiving deposits under the saving schemes- Directions issued by Reserve Bank-Such companies to deposit with public sector Banks or invest in unencumbered securities the aggregate amounts of liabilities to depositors-To disclose the same as liabilites in order to secure return of the money to depositors-Such directions whether statutory in nature-Whether ultra vires of Section 45K (3)-Whether violative of Articles 14 and 19 (1) (g) of the Constitution of India.

Constitution of India, 1950:

Articles 14, 19 (1) (g), 19 (6): Directions issued by Reserve Bank of India to Residuary Non-Banking Companies under Sections 45 J and 45 K of the Reserve Bank of India Act, 1934 safeguarding the interest of the depositor-Vires of-Whether directions on the nature of reasonable restrictions.

Articles 13 (1) and (2) : Constitutionality of a statute-Real effect of the statute to be seen by lifting the veil of form and appearance of legislation-Degree of encroachment on fundametal rights-Consideration of-Test of fairness and reasonableness-Applicability of- Constitutionalty of the statute-Presumption of-Balance between public interest and individual interest-Maintaining of.

Practice & Procedure:

Function of Courts-Matters relating to financial and economic policies-Bodies like Reserve Bank of India fully competent-Court not to advise on such matters.

HEAD NOTE:

While pronouncing its Judgment in Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd., [1987] 1 SCC 424, this Court observed that it would be open to the Reserve Bank of India (RBI) to take such steps as were open to it in law to regulate 407 the savings schemes run by Residuary Non-Banking Companies (RNBCs) to prevent exploitation of ignorant investors while at the same time taking care to protect the thousands of employees working in such companies. This Court also expressed grave concern at the mushroom growth of financial investment companies offering staggering rates of interests to depositors leading to suspicion whether these companies were speculative ventures floated to attract unwary and credulous investors and capture their hard-earned savings.

Pursuant to the said observations of this Court and keeping in mind the public interest, the RBI in exercise of its powers under sections 45J and 45K of the Reserve Bank of India Act, 1934, and of all powers enabling it in that behalf, issued certain directions by way of Notification No. DFC-55/DG (O)-87 dated 15.5.1987.

A Writ Petition was filed before the High Court challenging the constitutional validity of the said directions issued by the RBI. A Single Judge of the High Court passed certain interim orders. Being aggrieved against the interim orders, the RBI preferred an appeal before the Division Bench. The Division Bench disposed of the appeal as well as the Writ Petition. It held that the RBI was empowered to issue directions to the Residuary Non- Banking Companies in the interest of depositors; but to the extent such directions were found to be prohibitory or unworkable and as such unreasonable, would be beyond the powers of RBI.

Peerless which became a party-respondent, filed an application for clarification of the judgment, as regards payment against discontinued certificates. The High Court clarified that in such cases the depositors be allowed to take loan against payments made till discontinuance on such terms and conditions as the company may stipulate.

The present appeals were filed by RBI against the orders of the High Court. A Writ Petition has been filed directly before this Court, challenging the directions as being ultra vires of sections 45J and 45K of the Reserve Bank of India Act, 1934 as also violative of the provisions of the constitution.

On behalf of the Writ Petitioners it was contended that since the 1987 directions issued by RBI were in the nature of subordinate legislation, it was clear that RBI overstepped the bounds of the 408 parent statute; that the source of power for issuing the directions as being derived from section 45L was only an after-thought; that from the working results it appeared impossible to carry on the traditional business for any longer period without incurring huge losses; that from in the business carried on by Peerless and other similar RNBCs that the working capital is generated out of the subscriptions received from the certificate holders either in lump sum or in instalments and such deposits are paid back with the guaranteed accretions, bonus, interest etc. in terms of contract at the end of the stipulated term; that the interest of the depositors has not been impaired in any manner whatsoever by the method of accountancy followed by Peerless and all similar companies, namely, appropriation of a part of the subscription to the profit and loss account and meeting the working capital requirements out of the same.

On behalf of the appellant-RBI, it was contended that it had the power to issue the said directions, that the said directions were issued in pursuance to this Court's observations, and in public interest; that the said directions had not imposed any restriction on the right to carry on business but only placed a restriction with respect to one of the modes of raising reserves i.e. through public deposits; that the directions cannot be condemned as being violative of Article 19(1) (g); and that formula laid down by the High Court was self-defeating and deprived altogether the benefits of security provisions given to depositors under the 1987 directions.

On behalf of the Peerless Field Officers Association, it was contended that if the directions of 1987 were to be upheld, the undertakings of Peerless would face inevitable closure and almost 14 lac field officers would lose their only source of livelihood.

Allowing the appeals filed by RBI and dismissing the Writ Petition filed by the Finance Companies, this Court,

HELD: Per Kasliwal, J

1.1 The Reserve Bank was competent and authorised to issue the impugned directions of 1987, in exercise of powers conferred under Section 45K(3) of the Act. [431 C]

1.2 A combined reading of Section 45J, 45K and 45L of the Reserve Bank of India Act, 1934 unmistakably goes to show that the Reserve Bank if it considers necessary in the public interest so to do, can specify the conditions subject to which any prospectus or advertisement soliciting deposits of money from the public may be 409 issued. It can also give directions to non-banking institutions in respect of any matters relating to or connected with the receipt of deposits, including the rates of interest payable on such deposits, and the periods for which deposits may be received. This latter power flows from sub-section (3) of Section 45K of the Act. The Bank under this provision can give directions in respect of any matters relating to or connected with the receipt of deposits. Thus a very wide power is given to the RBI to issue dirctions in respect of any matters relating to or connected with the receipt of deposits. It cannot be considered as a power restricted or limited to receipt of deposits only. Such an interpretation would be violating the language of section 45K (3) which furnishes a wide power to the Reserve Bank to give any directions in respect of any matters relating to or connected with the receipt of deposits. The Reserve Bank under this provision is entitled to give directions with regard to the manner in which the deposits are to be invested and also the manner in which such deposits are to be disclosed in the balance-sheet or books of accounts of the company. The word `any' qualifying matters relating to or connected with the receipt of deposits in the above provision is of great significance and directions of 1987 are fully covered under Section 45K (3) of the Act, which gives power to the Reserve Bank to issue such directions. [430 D-H; 431 A]

1.3 When an authority takes action which is within its competence, it cannot be said to be invalid merely because it purports to be made under a wrong provision, if it can be shown to be within its power under any other provision. [431 B] Indian Aluminium Company etc. v. Kerala State Electricity Board, [1976] 1 SCR 70, relied on.

2.1 The function of the Court is to see that lawful authority is not abused but not to attain itself the task entrusted to that authority. It is well settled that a public body invested with statutory powers must take care not to exceed or abuse its power. It must keep within the limits of the authority committed to it. It must act in good faith and it must act reasonably. Courts are not to interfere with economic policy which is the function of experts. It is not the function of the Courts to sit in Judgment over matters of economic policy and it must necessarily be left to the expert bodies. The function of the Court is not to advice in matters relating to financial and economic policies for which bodies like Reserve Bank are fully competent. It would be hazardous and risky for the Courts to tread an 410 unknown path and should leave such task to the expert bodies. [442 C-D]

2.2 Reserve Bank of India which is banker's bank is a creature of Statue. It has large contingent of expert advice relating to matters affecting the economy of the entire country and nobody can doubt the bonafides of the Reserve Bank in issuing the impugned directions of 1987.

The Reserve Bank plays an important role in the economy and financial affairs of India and one of its important functions is to regulate the banking system in the country.

It is the duty of the Reserve Bank to safeguard the economy and financial stability of the country. In fact the directions of 1987 were issued by RBI after mature consideration with the help and advice of experts. [441 B-D, 443 D-E] Delhi Cloth and General Mills etc. v. Union of India etc., [1983] 3 SCR 438; M/s Prag Ice & Oil Mills and Anr. v. Union of India, [1978] 3 SCC 459; Shri Sitaram Sugar Company Limited and Anr. v. Union of India & Ors., [1990] 3 SCC 223; R.K. Garg v. Union of India & Ors. etc., [1981] 4 SCC 675, relied on.

3. The Reserve Bank was right in taking the stand that if the companies want to do their business, they should invest their own working capital and find such resources elsewhere with which the Reserve Bank has no concern. [445- C]

4. It is not the concern of this Court to find out as to whether actuaial method of accounting or any other method would be feasible or possible for the companies to adopt while carrying out the conditions contained in paragraphs 6 and 12 of the directions of 1987. The companies are free to adopt any mode of accounting permissible under the law but it is certain that they will have to follow the entire terms and conditions contained in the directions of 1987 including those contained in paragraphs 6 and 12. [445 E-F]

5.1 It is not possible for the Court to determine as to how much percentage of deposit of first instalment should be allowed towards expenses which may consist of commission to agents, office expenses etc. It would depend from company to company based on various factors such as paid-up capital, percentage of commission paid to the agents, rate of interest paid to the depositors, period of maturity for repayment, office expenses and various other factors necessary to mop up working capital out of the depositors money.

411 One cannot ignore the possibility of persons having no stake of their own starting such business and after collecting huge deposits from the investors belonging to the poor and weaker sections of the society residing in rural areas, and to stop such business after a few years thus devouring the hard earned money of the small investors. In such kind of business, the agents always take interest in finding new depositors because they get a high rate of commission out of the first instalment, but they do not have same enthusiasm in respect of deposit of subsequent instalments. In these circumstances if the Reserve Bank has issued the directions of 1987 to safeguard the larger interest of the public and small depositors it cannot be said that the directions are so unreasonable as to be declared constitutionally invalid. [447 E-H, 448-A]

5.2 It cannot be said that the directions of 1987 amount to prohibition of the business in a commercial sense and without reasonable basis. Nor are the directions violative of Article 19(1) (g) of the Constitution of India.

[442 G-H, 443 A-B] Mohammad Yasin v. The Town Area Committee, Jalalabad and Anr., [1952] SCR 572; Premier Automobiles Ltd. and Anr v. Union of India, AIR 1972 SC 1690; Shree Meenakshi Mills Ltd. v. Union of India, AIR 1974 SC 366, referred to.

6. So far as Peerless is concerned there is no possibility of its closing down such business. It has already large accumulated funds collected by making profits in the past serveral years. Thus it has enough working capital in order to meet the expenses. It cannot be said that after some years Peerless will have to close down its business if the directions contained in paragraphs 6 and 12 are to be followed. The working capital is not needed every year as it can be rotated after having invested once. If the entire amount of the subscriptions is deposited or invested in the proportion of 10% in public sector banks, 70% in approved securities and 20% in other investments, such amounts will also start earning interest which can be added and adjusted while depositing or investing the subsequent years' deposits of the subscribers. In any case it lies with the new entrepreneurs while entering such field of business to make arrangement of their own resources for working capital and for meeting the expenses and they cannot insist in utilising the money of the depositors for this purpose. So far as the companies already in this field they must have earned profits in the past years which can be utilised as their working capital. It is important to note that the direc- 412 tions of 1987 have been made applicable from 15th May, 1987 prospectively and not retrospectively. [447 H; 448 C-F]

7. The directions of 1987 as well as any other directions issued from time to time by the Reserve Bank relating to economic or financial policy are never so sacrosanct that the same cannot be changed. Even the financial budget for every year depends on the economic and financial policy of the Government existing at the relevant time. So far as the impugned directions are concerned if it is found in future that the same are not workable or working against the public interest, the Reserve Bank is always free to change its policy and scrap or amend the directions as and when necessary. If at any time, the Reserve Bank feels that the business of the kind run at present by the Peerless and other companies in terms of the directions of 1987 are not yielding the result as envisaged by the Reserve Bank, it will always be prepared to consider any new proposals which may be conductive both in the interest of the large multitude of the investors as well as the employees of such companies. [448 G-H, 449 A-B] Per Ramaswamy, J. (Concurring) :

1. The directions of 1987 issued by RBI are within the power of the RBI to provide tardy, stable, identifiable and monitorable method of operations by each RNBC and its compliance of the directions. This will ensure security to the depositors at all times and also make the accounts of the company accurate, accountable and easy to monitor the working system of the company itself and continuance of its workmen. The directions in paragraphs 6 and 12 are just, fair and reasonable not only to the depositors, but in the long run to the every existence of the company and its continued business itself. Therefore, they are legal, valid and constitutionally permissible. [464 G-H, 465-A]

2. Section 45K of the Reserve Bank of India Act empowers the RBI to collect information from non-banking institutions as to deposit and to give directions that every non-banking institution shall furnish to the Bank, in such form, at such intervals and within such time, such statements, information or particulars relating to or connected with deposits received by the non-banking institution, as may be specified by RBI by general or special order including the rates of interest and other terms and conditions on which they are received. Under sub- section (3) thereof the RBI is entitled to issue 413 in the public interest directions to non-banking institutions in respect of any matter 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. The use of the adjective `any' matter relating to or connected with the receipt of deposits is wide and comprehensive to empower the RBI to issue directions in connection therewith or relating to the receipt of deposits. But exercise of the power is hedged with and should be `in the public interest'. [450 C-F]

3.1 The State can regulate the exercise of the fundamental right to save the public from a substantive evil. The existence of the evil as well as the means adopted to check it are the matters for the legislative judgment. But the court is entitled to consider whether the degree and mode of the regulation is in excess of the requirement or is imposed in an arbitrary manner. The Court has to see whether the measure adopted is relevant or appropriate to the power exercised by the authority or whether it over stepped the limits of social legislation.

Smaller inroads may lead to larger inroads and ultimately result in total prohibition by indirect method. If if directly transgresses or substantially and inevitably affects the fundametal right, it becomes unconstitutional, but not where the impact is only remotely possible or incidental. The Court must life the veil of the form and appearance to discover the true character and the nature of the legislation, and every endeavour should be made to have the efficacy of fundamental right maintained and the legislature is not invested with unbounded power. The Court has, therefore, always to guard against the gradual encroachments and strike down a restriction as soon as it reaches that magnitude of total annihilation of the right. [453 F-H, 454 A]

3.2 In the interest of the general public, the law may impose restrictions on the freedom of the citizen to start or carry on his business. Whether an impugned provision imposing a fetter on the exercise of the fundamental right guaranteed by Article 19(1) (g) amounts to a reasonable restriction imposed in the interest of general public, must be adjudged not in the background of any theoretical standard or pre-determinate patterns, but in the light of the nature and the incidence of the right, the interest of the general public sought to be secured by imposing restrictions and the reasonableness of the quality and the extent of the fetters imposed by the directions. The credit worthiness of RNBCs undoubtedly would 414 be sensitive. It thrives upon the confidence of the public, on the honesty of its management and its reputation of solvency. The directions intended to promote `freedom' and facility which are required to be regulated in the interest of all concerned. [457 E-F] Hatisingh Mfg. Co. Ltd. & Anr. v. Union of India & Ors., [1960] 3 SCR 528; Latafat Ali Khan & Ors. v. State of U.P., [1971] Supp. SCR 719, relied on.

4. There is presumption of constitutionality of every statute and its validity is not to be determined by artificial standards. The court has to examine with some strictness the substance of the legislation to find what actually and really the legislature has done. The court would not be over persuaded by the mere presence of the legislation. In adjudging the reasonableness of the law, the court will necessarily ask the question whether the measure or scheme is just, fair, reasonable and appropriate or unreasonable, unnecessary and arbitrarily interferes with the exercise of the right guaranteed in Part III of the Constitution. The Court has to maintain a delicate balance between the public interest envisaged in the challenged provision and the individual's right taking into account the nature of his right said to be infringed, the underlying purpose of the restriction, the extent and urgency of the evil sought to be remedied thereby, the disproportion of the restriction imposed, the prevailing condition at the time, the surrounding circumstances, the larger public interest which the law seeks to achieve and all other relevant factors germane for the purpose. All these factors should enter into the zone of consideration to find the reasonableness of the impugned restriction. The Court weighs in each case which of the two conflicting public or private interest demands greater protection and if it finds that the restriction imposed is appropriate, fair and reasonable, it would uphold the restriction. The court would not uphold a restriction which is not germane to achieve the purpose of the statute or is arbitrary or out of its limits. [454 B-C, E-G]

5. The directions are incorporated and became part of the Act itself. They must be governed by the same principles as the statute itself. The statutory presumption that the legislature inserted every part thereof for a purpose and the legislative intention should be given affect to, would be applicable to the directions of 1987 as well. [445-E]

6.1 The RBI issued the directions to regulate the operations 415 of the RNBCs, to safeguard the interest of the depositors.

Payment of interest, bonus, premium or other advantage, in whatever name it may be called is reward for waiting or parting with liquidity. It is paid because of positive time preference (one rupee today is preferred to one rupee tomorrow) on the part of the depositor. Therefore, the directions avowed to preserve the right of the depositors to receive back the amount deposited with the contracted rate of interest; it aims to prevent depletion of the deposits collected from the weaker segments of the society and also tends to affect free flow of the business of the RNBCs who would desire to operate in their own way. [455 F-H]

6.2 Mushroom growth of non-banking agencies put afloat diverse schemes with alluring offers of staggering high rate of interest and other catchy advantages which would generate suspicion of the bona fides of the offer. But gullible depositors are lured to make deposits. It is not uncommon that after collecting fabulous deposits, some unscrupulous people surreptiously close the company and decamp with the collections keeping the depositors at bay. Therefore, the need to regulate the deposits/subscriptions, in particular in private sector became imperative to prevent exploitation or mismanagement as a social justice strategem. [457 A-B]

6.3 RBI occupies place of `pre-eminence' to ensure monetary discipline and to regulate the economy or the credit system of the country as an expert body. It also advises the Government in public finance and monetary regulations. The banks or non-banking institutions shall have to regulate their operations in accordance with not only as per the provisions of the Act but also the rules and directions or instuctions issued by the RBI in exercise of the power there under. Chapter 3B of the Reserve Bank of India Act expressly deals with regulations of deposit and finance received by the RNBCs. The directions, therefore, are statutory regulations. [455 B-D] Joseph Kuruvilla Vellukunnel v. Reserve Bank of India & Ors., [1962] Suppl. 3 SCR 632; State of U.P. v. Babu Ram, [1961] 2 SCR 679; D.V.K. Prasada Rao v. Govt. of A.P., AIR 1984 A.P. 75, relied on.

7. The objects of the direction are to preserve the ability of the RNBC to pay back to subscribers/depostitors at any given 416 time; safety of the subscribers' money and his right to unencumbered repayment are thus of paramount public interest and the directions aimed to protect them. The directions cannot and would not be adjudged to be ultra vires or arbitrary by reasons of successful financial management of an individual company. An overall view of the working system of the scheme is relevant and germane. [460 C-D]

8. The obligation in paragraph 12 of periodical disclosure in the accounts of a company of the deposits together with the interest securd thereon, whether or not payable, but admittedly due as a liability, is to monitor the discipline of the operation of the schemes and any infraction, would be dealt with as per law. The certificate by a qualified Chartered Accountant is to vouchsafe the correctness and authenticity of accounts and would and should adhere to the statutory compliance. [460 D-E]

9. The settled accounting practice is that a loan or deposit received from a creditor has to be shown as a liability together with accrued interest whether due or deferred. The actuarial accounting applies to revenues and costs to which the concept of the `going concern' can be adopted. Therefore, in providing the costs of the company it can set apart its costs on the basis that liability is created for interest, bonus etc. payable in foreseeable future. Undoubtedly the actuarial principle applied by the LIC or the gratuity schemes are linked with life of the assured or the premature death before retirement of an employee, but RNBC in its contract does not undertake any such risk. The deposit or loan is a capital receipt but not a revenue receipt and its full value shall be shown in the account books or balance-sheet as liability of the company.

It cannot be credited to the profit and loss account. Part II of Schedule I of the Companies Act, 1956 requires that the amount shown in the profit and loss account should be confined to the income and expenditure of the company. Para 12 of the directions is, thus, in consonance with the Companies Act. Paragraph 6 only elongates the contract in the public interest to safeguard the interest of the vulnerable sections of the depositors. The RBI cannot be expected to constantly monitor the working of the RNBC in its day-to-day function. The actuarial basis cannot be adopted by the RNBCs. and the liability must always be reflected in its balance-sheet at its full value.

Compliance of the direction in para 12, dehors any method of accountancy adopted by a company, intended to discipline its operations. [460 E-H, 461 A-C] 417

10. Regulation includes total prohibition in a given case where the mischief to be remedied warrants total prohibition. The directions of 1987 are neither palpably arbitrary nor unjust nor unfair. The mechanism evolved in the directions is fool-proof, to secure the interest of the depositors, as well as capable of monitoring the business management of every RNBC. It also protects the interest of the employees/field staff/commission agents etc. on permanent basis over-coming initial convulsion. It was included, in the best possible manner, to subserve the interest of all without putting any prohibition in the ability of a company to raise the deposit, even the absence of any adequate paid up capital or reserve fund or such pre- commitment of the owner, to secure such deposits. [462 E-G] Narendra Kumar v. Union of India, [1960] 2 SCR 375, relied on.

Reserve Bank of India etc. v. Peerless General Finance and Investment Co. Ltd. & Ors. etc., [1987] 2 SCR 1, referred to.

11. So long as the power is traceable to the statute, mere omission to recite the provision does not denude the power of the legislature or rule making authority to make the regulations, nor consiered without authority of law.

The asbsence of reiteration of objective satisfaction in the preamble as of one under Section 45L does not denude the powers; the RBI admittedly has the power under Section 45L, to justify the actions. Though Section 45L was neither expressly stated nor mentioned in the Preamble of the directions of the required recitation or satisfaction of objective facts to issue the directions, from the facts and circumstances it is demonstrated that the RBI, had such satisfaction in its consideration the power under Section 45L, when the directions were issued. Even otherwise Section 45K (3) itself is sufficient to uphold the directions. [464 F-H] 1.2. The court has to see whether the scheme, measure or regulation adopted is relevant or appropriate to the power exercised by the authority. Prejudice to the interest of depositors is a relevant factor. Mismanagement or inability to pay the accrued liabilities are evils sought to be remedied. The directions of 1987 designed to preserve the right of the depositors and the ability of RNBC to pay back the contractual liability. It also intended to prevent mismanagement of the deposits collected from vulnerable social segments who have no knowledge of banking operations or credit system and repose unfounded blind faith on the company with fond hope of its ability to pay back the contracted amount. Thus the directions maintain 418 the thrift for saving and streamline and strengthen the monetary operations of RNBCs. [463 E-G]

ORIGINAL JURISDICTION: Writ Petition (Civil) No. 677 of 1991.

(Under Article 32 of the Constitution of India)

WITH Civil Appeal Nos.400-403 of 1992.

Shanti Bhushan, Somnath Chatterjee, Biswarup Gupta, Bhaskar Gupta, G.L. Sanghi, Arun Jaitley, Dr. Debi Pal, Anil Diwan A.K. Sen, Harish N. Salve, H.S. Prihar, Kuldip S. Parihar, Gopal Subramanium, Abhijit Chatterjee, B. Lahiri, J.B. Dadachanji, S.Sukumaran, R.F. Nariman, G.S. Chatterjee, Ms. Sumita Chatterjee, Ms. Mridula Ray, Arun Madan, Ms. Priya Hingorani, Ms. Radha Rangaswamy, C.N. Sreekumar, Rathin Das, Ranjit Ghose, Sushil Kumar Jain, Sudhanshu Atreya and Dr. A.M. Singhvi for the appearing parties.

The Judgment of the Court was delivered by KASLIWAL, J. Special Leave granted in all the petitions.

This litigation is an upshot of the earlier case Reserve Bank of India v. Peerless General Finance and Investment Company Ltd. and Others, [1987] 1 S.C.C. 424 decided on January 22,1987. In 1978 th Prize Chits and Money Circulation Scheme (Banning) Act, 1978 (in short `the Banning Act, was enacted `to ban the promotion or conduct of prize chits or money circulation schemes and for matters connected therewith or incidental `hereto.' The question which arose in the above case was whether the Endowment Scheme piloted by the Peerless General Finance and Investment Company Ltd., (hereinafter in short `the Peerless') fell within the definition of `Prize Chits' within' the meaning of Sec. 2(e) of the above Banning Act.

By a letter dated July 23, 1979, the Reserve Bank of India pointed out to the Peerless that the schemes conducted by it were covered by the provisions of the Banning Act which had come into force w.e.f. December 12, 1978. On September 3, 1979 the Peerless filed a writ petition in the Calcutta High Court for a declaration that the Prize Chits Banning Act did not apply to the business carried on by the Peerless. A similar writ petition was filed questioning a notice issued by the Madhya Pradesh Government on the same lines as that issued by the West Bengal 419 Government. A learned Single Judge of the High Court dismissed both the writ petitions but appeals preferred by the Peerless under the Letters Patent were allowed by a Division Bench of the Calcutta High Court.

It was declared that the business carried on by the Peerless did not come within the mischief of the Prize Chits Banning Act. Against the judgment of the Division Bench of the Calcutta High Court, the Reserve Bank of India, the Union of India and the State of West Bengal preferred appeals before this court. The question considered in the above case was ``Is the endowment scheme of the Peerless Company a Prize Chit within the meaning of Section 2(e) of the Prize Chits and Money Circulation Schemes (Banning) Act?'' This court held that section 2(e) does not contemplate a scheme without a prize and, therefore, the Endowment Certificate Scheme of the Peerless Company was outside the Prize Chits Banning Act. Appeals filed by the Reserve Bank of India, the Union of India and the State of West Bengal were accordingly dismissed. Chinnappa Reddy,J. observed:

``It is open to them to take such steps as are open to them in law to regulate schemes such as those run by the Peerless Company to prevent exploitation of ignorant subscribers. Care must also be taken to protect the thousand of employees. We must also record our dissatisfaction with some of the schemes of the Life Insurance Corporation which appear to us to be even less advantageous to the subscribers than the Peerless Scheme. We suggest that there should be a complete ban on forfeiture clauses in all savings schemes, including Life Insurance Policies, since these clauses hit hardest the classes of people who need security and protection most. We have explained this earlier and we do wonder whether the weaker sections of the people are not being made to pay the more affluent sections! Robbing Peter to pay Paul? It was further observed ``We would also like to query what action the Reserve Bank of India and the Union of India are taking or proposing to take against the mushroom growth of finance and investment companies'' offering staggeringly high rates of interest to depositors leading us to suspect whether these companies are not speculative ventures floated to attract unwary and credulous investors and capture their savings. One has only to look at the morning's newspaper to be greeted by advertisements inviting deposits and offering interest at astronomic rates. On January 1, 1987 one of the national newspapers published from Hyderabad, where one of us happened to be spend- 420 ing the vacation, carried as many as ten advertisements with `banner headlines' covering the whole of the last page, a quarter of the first page and conspicuous spaces in other pages offering fabulous rates of interest. At least two of the advertisers offered to double the deposit in 30 months, 2000 for 1000, 10,000 for 5,000, they said.

Another advertiser offered interest ranging between 30 per cent to 38 per cent for periods ranging between six months to five years. Almost all the advertisers offered extra interest ranging between 3 per cent to 6 per cent if deposits were made during the Christmas-Pongal season. Several of them offered gifts and prizes. If the Reserve Bank of India considers the Peerless Company with eight hundred crores invested in government securities, fixed deposits with National Banks etc. unsafe for depositors, one wonders what they have to say about the mushroom non-banking campanies which are accepting deposits, promising most unlikely return and what action is proposed to be taken to protect the investors. It does not require much imagination to realise the adventurous and precarious character of these business. Urgent action appears to be called for to protect the public. While on the one hand these schemes encourage two vices affecting public economy, the desire to make quick and easy money and the habit of excessive and wasteful consumer spending, on the other hand the investors who generally belong to the gullible and less affluent classes have no security whatsover. Action appears imperative.'' Khalid, J., another learned Judge aggreeing with the judgment of Chinnappa Reddy, J., further added his short but important concluding paragraph as under :

``I share my brother's concern about the mushroom growth of financial companies all over the country.

Such companies have proliferated. The victims of the schemes, that are attractively put forward in public media, are mostly middle class and lower middle class people. Instances are legion where such needy people have been reduced penniless because of the fraud played by such financial vultures. It is necessary for the authorities to evlove 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.'' Taking note of the weighty observations made by this Court, the 421 Reserve Bank of India in exercise of the powers conferred by Section 45 (J) and 45 (K) of the Reserve Bank of India Act, 1934 (hereinafter referred to as the Act) and of all the powers enabling it in this behalf and considering it necessary in the public interest issued certain directions by notification No. DFC.55/DG(O)-87 dated the 15th May, 1987 (hereinafter referred to as the `directions of 1987'). The constitutional validity of these directions of 1987 was challenged by Timex Finance and Investment Company Ltd.

(hereinafter referred to as `Timex Company') by filing a writ petition in the Calcutta High Court before the learned Single Judge. The learned Single Judge granted an interim order in terms of prayers (g) and (h) of the writ petition.

The Reserve Bank of India aggrieved against the interim order filed an appeal before the Division Bench. A stay petition was also moved on behalf of the Reserve Bank of India for staying the operation of the order dated 7th October, 1988 passed by the learned Single Judge. After hearing the stay petition for sometime, the Division Bench of the High Court listed the appeal as well as the stay petition for final disposal. The Division Bench of the High Court disposed of the appeal as well as the writ petition by an order dated March 23, 1990 and arrived to the following and conclusions.

"(a) Reserve Bank of India is empowered to issue directions to the residuary non-banking companies under the provisions of Section 45J and 45K of the Reserve Bank of India Act, 1934 for the interest of thousands of depositors.

(b) However, to the extent such directions are found to be prohibitory or not workable and as such unreasonable must be held to be beyond the powers of the Reserve Bank of India.

(c) The impugned directions providing that they represent irreducible minimum for safeguarding the interest of and for preventing exploitation of small and unwary depositors cannot be implemented without suitable modification. It is not reasonably practicable to comply strictly with the directions as they stand by the writ petitioners and the similarly situated companies. The Supreme Court in Peerless case (Supra).....reserved the liberty to the Reserve Bank of India to take such steps as are open to them in law to regulate the schemes such as those granted by the Peerless to prevent exploitation of subscribers and to protect thousands of employees. The impugned directions without modifications will run counter to the aforesaid directions of the Supreme Court.

(d) The business of savings and investments carried on by the company and similarly situated companies having not been declared unlawful or banned, power of the Reserve Bank of India to regu- 422 late such business cannot be permitted to be prohibitory resulting in the ultimate closure of the business carried on by the writ petitioner company and other similarly situated companies. If the modifications as suggested by us are not implemented and if ultimately the business is closed down and the company goes into liquidation, the hard earned money of thousands of depositors will be lost and the employees would also lose their job. If even after modifications are made to the impugned directions in terms of this order, any company fails to comply with such directions, the Government may take such steps as are open to them to protect the interests of the thousands of small depositors and numerous employees.

(e) The reasons why the impugned directions cannot be complied with and held to be unworkable and unreasonable are mainly because of the definition of liability assigned in the impugned directions.

The impugned directions, as they stand now, cannot be implemented by the residuary non-banking companies without incurring loss irrespective of their net-worth. According to the impugned directions, the liability is the amount of money deposited by the depositions plus the amount of interest whether or not due to them according to the terms of the respective contracts at the given point of time. In other words, the entire collection with the interest, Bonus, etc. whether payable or not would be the liability of the Company. This leaves no fund for working. If the definition of liability is amended as suggested by us, it will be possible for the companies to generate working capital. In our view, liability in clause 6 and in other clauses of the impugned directions should be construed to mean total amount of contractual dues of the depositors including interest, premium, bonus or other advantages by whatever name called, accrued on the amount according to the terms of contract. Section 45J and 45K of the Act do not authorise the Reserve Bank of India to introduce a concept of liability which is contrary to the accepted commercial practice and trading principles. The impugned directions have failed to make distinction between the actual liability in presenti and a liability de futuro. Liberty must be reserved to the companies to adopt normal accountancy practice recognised and accepted in the trading circles so long as such accounting practice provides for payment of the liability to the depositors in accordance with the contractual obligations. However, the Reserve Bank of India may, having regard to the facts and circumstances of each case issue directions regulating the administrative and management expenses and expenditure on com- 423 mission and publicity. In the impugned directions no restriction has been imposed on the expenditure by a residuary non-banking company on any of these heads.

In our view, the impugned directions without modifications, instead of suppressing the mischief, will only lead to adverse unworkable and/or impracticable results inasmuch as if the residuary non-banking companies cannot comply with such directions in toto, such companies have to go out of existence. This cannot be the object of the impugned directions. If the liability in terms of the contractual obligations is provided not only in the accounts but also by suitable investment in terms of Clause 6 of the directions, in our view, all the residuary non-banking companies, irrespective of their net worth, will be able to carry on the business.

(f) Every residuary non-banking company shall disclose its Books of Accounts and balance sheet the aggregate amount of liability accrued and payable to the depositors in accordance with the terms of the contract.

(g) The directions contained in clause 6 for deposit or investment and the liability shall be read subject to the modification of the designation of the liability as aforesaid.

(h) The directions are prospective. The period of deposit and the date of return with respect to all certificates issued prior to 15th May 1987 have been excluded from the purview of the directions as per clause 18 (1). This exemption should include all contractual obligations on those certificates.

(i) All funds prior to the issue of the directions should be allowed to be kept in the manner as was being done by the respective residuary non-banking company. The direction with regard to the investment shall be applicable from the money collected and/or received on and after 15th May 1987. The companies shall be allowed reasonable time to make good the deficiency in the investment required to be made in terms of the directions after 15th May 1987.

(j) We are not unmindful of the fact that exercise of power by legislature and executive is subject to judicial restraint. The only check on judicial exercise of power is the self-imposed dicipline of judicial restraint. But although the courts in exercise of judicial power are not competent to direct the enactment of a particular provision of law, if the statutory directions suffer from arbitrariness, the court is competent to issue necessary direction so that the statutory directions may be brought in conformity 424 with law. As we have held that the Reserve Bank of India has transgressed the statutory power to the extent indicated elsewhere in the judgment, we are of the view that the Reserve Bank of India shall modify the directions and make them reasonable and workable to safeguard the interest of depositors and protect the employees.'' The Division Bench also considered an application filed by Favourite Small Investment Company and by order dated 20th December, 1990 directed that the Reserve Bank of India should revoke the prohibitory order and permit Favourite Small Investment Company to accept fresh deposits and carry on new business.

It may be noted that the Peerless filed a petition before the High Court for becoming a party-respondent. The High Court by order dated 31st August, 1990 allowed the said application and further ordered that the cause title and the records proceedings of appeal, memorandum of appeal and the paper book filed be amended accordingly. The Peerless also moved an application for clarification of the judgment and order dated 23rd March, 1990. It prayed that suitable provision should be made for a depositor who wants back the money before maturity. If the depositor intends to get refund of the money invested before the expiry of actual contract period, he should be required to keep the funds for a minimum period in accordance with the contract. Before maturity he can only take loan but not the principle amount with interest. The amounts of returns should also be less than 5 per cent to provide for the collection and other expenses of the non-banking companies. The Division Bench of the High Court took the view that the order dated 23rd March, 1990 required clarification as it was not made clear as to whether non-residuary banking companies are under an obligation to pay discontinued certificates before the stipulated period in the contract, if so what would be the rate of interest. The Division Bench by order dated December 24, 1990 clarified its earlier order dated 23rd March, 1990 as under :

``(a) If the contract by and between the company and the depositor provides that no payment on discontinued certificate will be made before the expiry of the term stipulated in the contract, in such cases, if the certificate is discontinued any time before such stipulated term and payment is made to the depositors according to the terms and conditions of the contract, in other words, on the expiry of the term stipulated in the contract, such depositor shall be paid interest at the rate of 8% compound per annum, but in such a case the company will be at liberty to deduct an amount not exceeding 5% from the total return in or to provide for collection and other expenses incurred in connection with these 425 discontinued certificates (b) In cases where certificates are discontinued before or after the stipulated term but the depositors obtain refund only upon maturity of the certificates such refund shall be made to depositors with compound interest at the rate 8 % per annum without any deduction whatsoever.

(c) Since no payment will be made against the discontinued certificates to the depositors in such cases shall be permitted to take loan, if they so intend, against the payment made till discontinuance of such terms and conditions as the company may stipulate." The Reserve bank of India aggrieved against all the above orders of the Calcutta High Court has filed appeals against the orders dated 23 rd March, 1990. 31st August, 1990, 20th December, 1990 and 24th December, 1990. The Peerless General Finance and Investment Company Ltd., has also filed a writ petition No. 677 of 1991 directly before this Court under Article 32 of the Constitution of India.

In view of the fact that the questions raised in the appeals filed by the Reserve Bank of India against the orders of the High Court and in the civil writ petition filed by the Peerless Company are common, the same were heard together and are disposed of by a single order.

Interlocutory applications were also filed on behalf of the employees of the Peerless Company, agents of Peerless Company working in the field, and some of the depositors in the Peerless company. We have heard them also.

The main controversy centers round paragraphs (6) and (12) of the directions of 1987 and as such the same are reproduced in full.

Paragraph (6) Security for depositors On and from 15th May 1987- (1) Every residuary non-banking company shall deposit and keep deposited in fixed deposits with public sector banks or invest and keep invested in unencumbered approved securities (Such securities being valued at their marked value for the time being), or in other investments, which in the opinion of the company are safe, a sum which shall not, at the close of business on 31st December 1987 and thereafter at the end of each half year that is, 30th June and 31st December be less than the aggregate amounts of the liabilities to the depositors whether or not such amounts have become payable:

426 Provided that of the sum so deposited or invested

(a) not less than ten percent shall be in fixed deposits with any of the public sector banks.

(b) not less than 70 percent shall be in unapproved securities;

(c) not more than 20 percent or ten times the net owned funds of the company, whichever amount is less, shall be in other investments, provided that such investments shall be with the approval of the Board of Directors of the Company.

Explanation :

"Net owned funds" shall mean the aggregate of the paid-up capital and free reserves as appearing in the latest audited balance sheet of the company as reduced by the amount of accumulated balance of loss, deferred revenue expenditure and other intangible assets, if any, as disclosed in the said balance sheet.

(2) Every residuary non-banking company shall entrust to one of the public sector banks designated in that behalf, deposits and securities referred to in clauses (a) and (b) of the proviso to subparagraph (1) to be held by such designated bank for the benefit of the depositors. Such securities and deposits shall not be withdrawn by the residuary non-banking company, or otherwise dealt with, except for repayment to the depositors.

(3) Every residuary non-banking company shall furnish to the Reserve Bank within thirty days from the close of business on 31st December 1987 and thereafter at the end of each half year that is as on 30th June and 31st December, a certificate from its auditiors, being members of Institute of Chartered Accountants, to the effect that the amounts deposited in fixed deposits and the investments made are not less than the aggregate amounts of liabilities to the depositors as on 30th June and 31st December of that year.

Explanation :

For the purpose of this paragraph, (a) "Aggregate amounts of liabilities" shall mean total amount of deposits received together with interest, premium, bo- 427 nus or other advantage by whatever name called accrued on the amount of deposits according to the terms of contract.

(b) "approved securities" means; the securities in which the Trustee is authorised to invest trust money by any law for the time being in force in India and bonds or fixed deposits issued by any corporation established or constitued under any Central or State enactments.

(c) "public sector banks" means, the State Bank of India, the Subsidiary Banks and the corresponding new banks referred to in Section 45(1) of the Reserve Bank of India Act. 1934 (2 of 1934).

(d) "unencumbered approved securities" shall include the approved securities lodged by the company with another institution for advances or any other credit arrangements to the extent to which such securities have not been drawn against or availed of.

Paragraph (12) Every residuary non-banking company shall disclose as liabilities in its books of accounts and balance sheets the total amount of deposits received together with interest, bonus, premium or other advantage, accrued or payable to the depositors.

We would first deal with the legal objections raised on behalf of the Peerless and other companies. It has been submitted on behalf of the Peerless and other companies that the directions of 1987 are ultra vires of Section 45J and 45K of the Reseve Bank of India Act, 1934. None of the said sections authorises the Reserve Bank to frame any directions prescribing the manner of investment of deposits received or the method of accountancy to be followed or the manner in which its balance-sheet and books of accounts are to be drawn up. It has been contended that Section 45J has no manner of application in the present case. Section 45K (3) of the Act on which reliance has been placed on behalf of the Reserve Bank, merely provides that the Reserve Bank may, if it considers necessary in the public interest so to do, give directions to non-banking institutions either generally or to any non-banking institutions in particular, in respect of any matters relating to or connected with receipts of deposits, including the rate of interest payable on such deposits and the purpose for which deposits will be received. According so Sec. 45K (4) if any non-banking institution fails to comply with any direction given by the bank under sub- 428 s. (3) the Reserve Bank may prohibit the acceptance of deposits by that non-banking institution. It is thus submitted that on a plain reading of Sec. 45K (3) the Reserve Bank is only competent to frame the directions regarding receipt of deposits and such power of direction does not extend to providing the manner in which deposits can be invested or the manner in which the liabilities are to be disclosed in the balance-sheet or books of accounts of the company. It is further submitted that the power under subs. (4) is to prohibit acceptance of deposits and as such the permissible field of direction making is limited to receipt of deposits and nothing more. The Reserve Bank of India in framing the directions of 1987 which is a subordinate piece of legislation has clearly over-stepped the bounds of the parent statue of Sec. 45K (3) of the Act.

It is further argued that the Reserve bank cannot contend that paragraphs 6 and 12 of the directions of 1987 are covered within the powers conferred on the Reserve Bank under Sec. 45L (1) (b) of the Act. It is submitted that the Reserve Bank had at no point of time expressed its intention to invoke its powers under Sec. 45L. Even before the Division Bench of the Calcutta High Court the Reserve Bank did not rely on Sec. 45L as alleged source of its power to issue the impugned directions nor the Reserve Bank referred to Sec. 45L in its pleadings before the High Court.

Wherever the Reserve Bank of India wanted to invoke its power under Sec 45L of the Act, it has expressly mentioned that it was exercising its powers under Sec. 45L. In the case of non-banking financial companies (Reserve Bank) directions 1977, or the miscellaneous non-banking companies (Reserve Bank) Directions, 1977 it has expressly said that it was invoking its powers under sec. 45L of the Act, whereas in the case of the impugned directions, the Reserve Bank has only referred to sections 45J and 45K of the Act.

The Reserve Bank of India itself in the affidavit filed before the High Court had stated that the directions of 1987 were framed after careful deliberations at the highest level and now it cannot take the stand that the source of its power in framing the impugned directions was exercised under sec 45L of the Act. It is further contended that in order to invoke the powers under sec 45L of the Act it has to state that the Reserve Bank was satisfied for the purpose of enabling it to regulate the credit system of the country to its advantage and it was necessary to give such institutions directions relating to the conduct of business by financial institution or institutions. In order to exercise its powers under sec. 45L of the Act, it has to apply its mind for the purpose of arriving at the statutorily required satisfaction. In fact, such recital is necessary since such satisfaction is a pre-conditions for the Reserve Bank to exercise its powers under section 45L of the Act.

On the other hand it has been contended on behalf of the Reserve 429 Bank that the power of the Reserve Bank to regulate deposit acceptance activities of non-banking and financial institutions under Chapter IIIB of the Act cannot be disputed. The Reserve Bank has power to issue the impugned directions under Section 45J, 45K and 45L of the Act. The pith and substance of Para 6 of the directions of 1987 is to ensure that deposits received from the public are invested in a manner to secure the repayment of the deposits. A deposit is, by definition, a sum of money received with a corresponding obligation to repay the same. Thus, the repayment of the deposit is an integral part of the transaction of a receipt of deposit. It is contended that the expression "receipt of deposit" must be construed liberally, in the light of the nature of the provisions as well as in the light of the wide language used in the provision. It is also argued that even if the impugned directions of 1987 are not covered under the powers conferred under Sections 45J and 45K of the Act, those are squarely covered by Section 45L of the Act. It is submitted that various provisions under the Act are enabling in nature and confer overlapping powers. Even if there is no recital of Sec. 45L, it would not be of much consequence, if such exercise of power can be related to Sec. 45L of the Act.

We have considered the arguments advanced by learned counsel for the parties. Chapter IIIB laying down provisions relating to non-banking institutions receiving deposits and financial institutions was inserted in the Reserve Bank of India Act, 1934, by virtue of Act 55 of 1963 w.e.f. 1.2.1964. Section 45J, 45K (3) & (4) and 45L 1 (b) relevant for our purpose are given as under :

Sec. 45J "The Bank may, if it considers necessary in the public interest so to do, by general or special order, - (a) regulate or prohibit the issue by any non- banking institution of any prospectus or advertisement soliciting deposits of money from the public; and (b) specify the conditions subject to which any such prospectus or advertisement, if not prohibited, may be issued.

Section 45K (1) ..........

(2) ..........

(3) The Bank may, if it considers necessary in the public interest so to do, give direction to non-banking institutions either generally or to any 430 non-banking institution or group of non-banking institutions in particular, in respect of any matters relating to or connected with the receipt of deposits, including the rates of interest payable on such deposits, and the periods for which deposits may be received.

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

Section 45L (1) If the bank is satisfied that for the purpose of enabling it to regulate the credit system of the country to its advantage it is necessary so to do; it may- (a) ..........

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

A combined reading of the above provisions unmistakably goes to show that the Reserve Bank if considers necessary in the public interest so to do can specify the conditions subject to which any prospectus or advertisement soliciting deposits of money from the public may be issued. It can also give directions to non-banking institutions in respect of any matters relating to or connected with the receipt of deposits, including the rates of interest payable on such deposits, and the periods for which deposits may be received. This latter power flows from sub-s. (3) of Sec. 45K of the Act. The Bank under this provision can give directions in respect of any matters relating to or connected with the receipt of deposits (emphasis added). In our view a very wide power is given to the Reserve Bank of India to issue directions in respect of any matters relating to or connected with the receipt of deposits. It cannot be considered as a power restricted or limited to receipt of deposits as sought to be argued on behalf of the companies that under this power the Reserve Bank would only be competent to stipulate that deposits cannot be received beyond a certain limit or that the receipt of deposits may be linked with the capital of the company. Such interpretation would be violating the language of Sec. 45K (3) which furnishes a wide power to the Reserve Bank to give any directions in respect of any matters relating to or connected with the receipt of deposits. The Reserve Bank under this provision is entitled to give directions with regard to the manner in which the deposits are to be invested and also the manner in which such deposits are to be disclosed in the balance-sheet or books of accounts of the company. The word `any' quali- 431 fying matters relating to or connected with the receipt of deposits in the above provision is of great significance and in our view the impugned directions of 1987 are fully covered under Sec. 45K (3) of the Act, which gives power to the Reserve Bank to issue such directions. As a proposition of law we agree with the contention of the learned counsel for the Reserve Bank that when an authority takes action which is within its competence, it cannot be held to be invalid merely because it purports to be made under a wrong provision, if it can be shown to be within its power under any other provision. Learned counsel in this regard has placed reliance on Indian Aluminium Company etc. v. Kerala State Electricity Board, [1976] 1 S.C.R. 70.

In our view as already held above, the Reserve Bank was competent and authorised to issue the impugned directions of 1987, in exercise of powers conferred under Section 45K (3) of the Act.

Having cleared the ground of ultra vires we must now turn to the main challenge posed on behalf on the Peerless and other companies and employees.

Mr. Harish Salve made the leading arguments on behalf of the Reserve Bank of India. His main thrust of the argument was that the Reserve Bank of India had issued these directions of 1987 in order to carry out observations made by this Court in Peerless case (supra) and in the public interest of safeguarding the money of the depositors in