The Supreme Court ruled that all other provisions of the Gujarat Act are sought to be applied to NBFCs operating in the State of Gujarat.
All the appeals, by the NBFCs operating in the State of Kerala, arise out of writ petitions seeking a declaration that NBFCs registered under the RBI Act will not come within the purview of the Kerala Act. Apart from several appeals, there is also a petition in Transfer Petition, filed by the Chief Executive Officer of one NBFC by name Bajaj Finance Limited, seeking a transfer of the quash petition pending on the file of the High Court of Kerala under Section 482 of the Code of Criminal Procedure praying for quashing an FIR registered under the Kerala Act.
The Bombay Money Lenders Act, 1946, which was applicable in the State of Gujarat, was sought to be invoked by the Registrar in the office of the Prevention of Money Lenders, against NBFCs operating in the State of Gujarat, in the year 2009. Challenging the action so initiated, NBFCs filed a batch of special civil applications before the High Court of Gujarat. When it was pending, the decision of the Kerala High Court came. But disagreeing with the view taken by the Kerala High Court, a Judge of the Gujarat High Court quashed the notices issued to the NBFCs under the Bombay Money Lenders Act, by a judgment.
Senior Advocate Jaideep Gupta, appearing for the State of Kerala, contended that the Reserve Bank of India does not control the rate of interest charged by NBFCs on the loans advanced by them and that, therefore, a State enactment which seeks to control this aspect, namely, the rate of interest cannot be said to be repugnant.
He argued that a statutory enactment which does not deal with such an important issue as the rate of interest chargeable on the loans, cannot be said to be a complete code in itself.
He further contended that the power of the RBI under Section 45JA to determine the policy and give directions, are circumscribed by the words “relating to income recognition, accounting standards, making of proper provision for bad and doubtful debts, capital adequacy based on risk weights for assets and credit conversion factors for off balance sheet items and also relating to deployment of funds”.
The division bench of Justice Hemant Gupta and Justice V. Ramasubramanian said that NBFCs which play a very vital role in contributing to the financial health of the country and whose operations are controlled by RBI with the avowed object of operating the currency and credit system of the country to its advantage, have as their life line, the income received by way of interest on the loans advanced. Therefore, to say that RBI has no say in such a matter of vital interest, will strike at the very root of the statutory control vested in RBI.
The court further added that it does not think that the words “relating to” appearing in Section 45JA(1) can be taken to restrict the power of RBI to give directions, only in relation to the matters mentioned after the words “relating to”. The items mentioned after the words “relating to” can only be taken to be illustrative and not exhaustive. This is for the reason that the power conferred by Section 45JA is both for determining the policy and for issuing direction.
The court stated that assuming that the Kerala Act was valid in its application to NBFCs when it was made, on the ground that the business of money lending is traceable to Entry 30 of List II, it has to give way for the parliamentary enactment.
The court said that the moment the Parliament stepped in to codify the law relating to registration and regulation of NBFCs, by inserting certain provisions in Chapter IIIB of the 47 RBI Act, the same would cast a shadow on the applicability (even assuming it is applicable) of the provisions of the Kerala Act to NBFCs registered under the RBI Act and regulated by RBI.
The court opined that the Kerala Act and the Gujarat Act will have no application to NBFCs registered under the RBI Act and regulated by RBI.
Therefore, the court allowed all the appeals filed by NBFCs against the judgment of the Kerala High Court and dismissed the appeals filed by the State of Gujarat against the judgment of the Gujarat high Court.
The court allowed the Transfer Petition, and quashed the First Information Report filed against the officer of the NBFC for violation of the provisions of the Kerala Act.
Case title: Nedumpilli Finance Company Limited v/s State of Kerala & Ors.
Citation: Civil appeal no. 5233 0f 2012