/2022 INSC 0367/ REPORTABLE      IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION/ CRIMINAL ORIGINAL JURISDICTION  CIVIL APPEAL NO. 5233 0F 2012 NEDUMPILLI FINANCE COMPANY LIMITED … APPELLANT(S) VERSUS STATE OF KERALA & ORS.                               …   RESPONDENT(S) WITH CIVIL APPEAL NO. 5230 OF 2012 CIVIL APPEAL NO. 5190 OF 2012 CIVIL APPEAL NO. 5191 OF 2012 CIVIL APPEAL NO. 5184 OF 2012 CIVIL APPEAL NO. 5241 OF 2012 CIVIL APPEAL NO. 5185 OF 2012 CIVIL APPEAL NO. 5111 OF 2012 CIVIL APPEAL NO. 5188 OF 2012 CIVIL APPEAL NO. 5187 OF 2012 1 CIVIL APPEAL NO. 5183 OF 2012 CIVIL APPEAL NO. 5113 OF 2012 CIVIL APPEAL NO.3857 OF 2022 (@ Special Leave Petition (Civil) No.8331 of 2015) TRANSFER PETITION (CRL.) NO. 359 OF 2015 CIVIL APPEAL NO. 5186 OF 2012 CIVIL APPEAL NO. 5192 OF 2012 CIVIL APPEAL NO. 5189 OF 2012 CIVIL APPEAL NO. 5112 OF 2012 CIVIL APPEAL NO. 5232 OF 2012 CIVIL APPEAL NO. 5231 OF 2012 CIVIL APPEAL NO. 5234 OF 2012 CIVIL APPEAL NO. 5237 OF 2012 CIVIL APPEAL NO. 5238 OF 2012 CIVIL APPEAL NO. 5315 OF 2012 CIVIL APPEAL NOS. 18786­18787 OF 2017 CIVIL APPEAL NO. 1324 OF 2015 CIVIL APPEAL NO. 7836 OF 2012 2 J U D G M E N T V. RAMASUBRAMANIAN, J. 1. The question as to whether Non­Banking Financial Companies (for short “ NBFCs ”) regulated by the Reserve Bank of India, in terms of the provisions of Chapter III­B of the Reserve Bank of India Act, 1934 (hereinafter referred to as “ RBI Act” ) could also be regulated by State   enactments   such   as   Kerala   Money   Lenders   Act,   1958 (hereinafter referred to as “ Kerala Act ”) and Gujarat Money Lenders Act,   2011   (hereinafter   referred   to   as   “ Gujarat   Act”) ,   has   arisen   for our   consideration   in   these   appeals,   with   the   Kerala   and   Gujarat High Courts taking opposite views. 2. We   have  heard   the  learned  counsel  for  the   respective  parties, the   learned   senior   counsel   appearing   for   the   State   of   Kerala,   the learned standing counsel appearing for the State of Gujarat and the learned counsel appearing for RBI. 3 FACTUAL MATRIX 3. A brief sojourn into the factual matrix may provide the setting, in   the   context   of   which,   the   above   question   of   law   has   arisen.   It goes as follows:­ KERALA 3.1   The   legislature   of   the   State   of   Kerala   passed   the   Kerala   Act, 1958,  with  the  professed  object of  providing   for   the  regulation  and control of the business of money lending in the State of Kerala. The statement of objects and reasons spelt out, that by passing the said enactment, “ it was intended to regulate the interest to be charged by money   lenders   and   to   provide   protection   to   borrowers ”.   At   the   time when   this   Act   was   enacted,   the   concept   of   non­banking   financial companies   was   not   very   familiar   in   India.   Therefore,   the   Reserve Bank   of   India   and   the   Parliament   had   not   stepped   in   to   regulate financial companies which were not banks or banking companies. 3.2 It   appears   that   after   the   mushroom   growth   of   NBFCs,   the Government   of   Kerala   started   insisting   upon   NBFCs   to   take   a license under the Kerala Act, failing which penal consequences were threatened.   Therefore,   after   unsuccessfully   approaching   the 4 Government   of   Kerala   for   exemption,   NBFCs   filed   a   batch   of   writ petitions on the file of the High Court of Kerala. 3.3 A   learned   Judge   of   the   High   Court   of   Kerala   dismissed   the batch   of   writ   petitions   and   the   said   order   was   confirmed   by   the Division   Bench   of   the   High   Court.   Therefore,   NBFCs   operating   in the State of Kerala have come up with the above batch of appeals. 3.4 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 (Crl.) No.359 of 2015, 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. GUJARAT 3.5 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 5 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   learned   Judge   of   the   Gujarat   High Court quashed the notices issued to the NBFCs under the Bombay Money Lenders Act, by a judgment dated 13.01.2010.  3.6 Thereafter,   the   legislature   of   the   State   of   Gujarat   passed   the Gujarat   Act,   2011   (Gujarat   Act   14   of   2011)   which   received   the assent   of   the   Governor   on   6.04.2011   and   was   published   in   the Gujarat Government Gazette on 8.04.2011. 3.7 Therefore, a fresh batch of special civil applications were filed, seeking   a   declaration   that   the   provisions   of   the   Gujarat   Act   14   of 2011 are not applicable to NBFCs registered under the RBI Act. The Division   Bench   of   the   High   Court   allowed   the   special   civil applications   holding   that   Gujarat   Act   14   of   2011   is   ultra   vires   the Constitution for legislative incompetence, to the extent that it seeks to   have   control   over   NBFCs   registered   under   the   RBI   Act.   A consequential direction was also issued by the Gujarat High Court 6 restraining   the   State   Government   from   applying   the   provisions   of the   Gujarat   Act   against   NBFCs   registered   under   the   RBI   Act. Therefore, the State of Gujarat has come up with Civil Appeals.  Scheme of Kerala Act, Gujarat Act and RBI Act 4. In the background of the facts narrated above, the legal issue arising   for   consideration   has   to   be   resolved   by   looking   at   the scheme of the two State enactments, the scheme of RBI Act and the relevant Entries in the appropriate List of the Seventh Schedule, to which these enactments can be traced. 4.1 List­I   of   the   Seventh   Schedule   to   the   Constitution   contains three entries which may be taken note of.  They are:­ (i) Entry No.38 : Reserve Bank of India (ii) Entry   No.43 :   incorporation,   regulation   and   winding up   of   trading   corporations   including   banking, insurance and financial corporations but not including cooperative societies. (iii) Entry No.45 : Banking 4.2 List II (State List)   of the Seventh Schedule contains an entry in   Entry   No.30 ,   which   reads:   “ money   lending   and   money   lenders; relief of agricultural indebtedness ”. 7 4.3 Therefore,   any   State   enactment   regulating   the   business   of money lending and intended to afford protection to borrowers, may fall   under   Entry   No.30   of   List­II.   But   at   the   same   time   any parliamentary enactment dealing with incorporation, regulation and winding up of financial corporations, would fall under  Entry No.43 in List­I. 4.4 Therefore, at the outset, it is clear that the competence of the legislatures   of   the   States   of   Kerala   and   Gujarat   to   enact   a   law   for the   regulation   of   the   business   of   money   lending   cannot   be questioned, as their  power  is traceable to Entry  30 of List­II of  the Seventh   Schedule.   But   at   the   same   time,   we   will   have   to   see whether   after   the   enactment   of   a   law   by   the   Parliament   for   the incorporation   and   regulation   of   financial   corporations,   such financial   corporations   would   continue   to   be   regulated   also   by   the State enactments, on the ground that they may also fall within the definition   of   the   expression   “ money   lenders ”   under   the   State enactments. 8 4.5 For finding an answer to the above question, it may be useful to   take   a   bird’s   eye   view   of   the   scheme   of   the   Kerala   and   Gujarat State enactments. Broad scheme of Kerala Act 4.6 In   a   way,   the   Kerala   Act   is   a   legacy   of   the   Madras   Pawn Brokers Act, 1943, whose provisions continued to be in force in the Malabar   District,   even   after   the   States   Reorganisation   Act,   1956, until it was repealed by Kerala Money Lenders (Amendment) Act 33 of 1963. 4.7 As   seen   from   the   statement   of   objects   and   reasons,   the   only object   of  the   Kerala   Money  Lenders  Act   was  to   afford  protection   to borrowers   from   unscrupulous   money   lenders   who   advanced usurious   loans.   Though   it   was   proclaimed   in   the   statement   of objects,   in   general   terms,   that   it   was   intended   to   regulate   the business  of   money   lending,  the   Act   was  primarily   intended  only   to cover one aspect of the business of financing. 4.8 Section   2(7)   of   the   Kerala   Act,   defines   a   “money   lender”   as follows:­ 9 “ 2. Definitions .  xxx xxx xxx  (7)   “money­lender”   means   a   person   whose   main   or subsidiary   occupation   is   the   business   of   advancing   and realising loans or acceptance of deposits in the course of such business  and  includes any person appointed by him  to be in charge of a branch office or branch offices or a liaison office or any   other   office   by   whatever   name   called,   of   his   principal place of business and a pawn broker, but does not include­ (a) a bank or a co­operative society; or (b) the   Life   Insurance   Corporation   of   India   established under   section   3   of   the   Life   Insurance   Corporation   Act, 1956 (Central Act 31 of 1956); or (bb)  the   Industrial   Credit   and   Investment   Corporation   of India   Limited   incorporated   under   the   India   Companies Act, 1913 (7 of 1913); (c) the   Industrial   Finance   Corporation   established   under section   3   of   the   Industrial   Finance   Corporation   Act, 1948  (Central Act 15 of 1948); or (d)  x x x x   (e)  the   State   Financial   Corporation   established   under   section   3   of   the   State   Financial   Corporation   Act,   1951   (Central Act 63 of 1951); or (f) any   institution   established   by   or   under   an   Act   of Parliament   or   the   Legislature   of   a   State,   which   grants any   loan   or   advance   in   pursuance   of   the   provisions   of that Act or, (g)  any   other   institution   in   the   public   sector,   whether incorporated   or   not   exempted   by   the   Government   by notification. Explanation I.  Where a person, who carries  on in the  State― of Kerala  the  Business  of advancing  and  realising  loans  is  resident outside the State, the agent of such person resident in the State shall be deemed to be the money­lender in respect of that business for the purposes of this Act. 10 Explanation II.  For the purposes of this Clause, clause (7A),― Proviso to sub­section (1) of section 3, clause (a) of sub­section (3) of section10, [section 16B] and section 17, the word “person” shall include “a firm or a joint family;” ” 4.9   As   seen   from   the   definition,   7   different   types   of   business entities   are   excluded   from   the   definition   of   the   expression   “ money lending ”. A  financial corporation  which  is not a bank and which is otherwise   known   as   NBFC,   is   not   listed   as   one   of   the   entities excluded from the definition of the expression “ money lender ”. 4.10     A   bank   is   excluded   from   the   definition   of   the   expression “ money   lender ”,   by   virtue   of   clause   (a).   But   the   word   “ bank ”   is defined in Section 2(1A) as follows:­ “ Sec. 2 (1A)  “bank”  means­ (i) a   banking   company   to   which   the   Banking   Regulation Act, 1949 (Central Act 10 of 1949), applies; (ii) the   State   Bank   of   India   constituted   under   the   State Bank of India Act, 1955 (Central Act 23 of 1955); (iii)  a subsidiary bank as defined in clause (k) of section of the   State   Bank   of   India   (Subsidiary   Banks)   Act.   1939 (Central Act 38 of 1959); (iv)  the   Industrial   Development   Bank   of   India   established under   the   Industrial   Development   Bank   of   India   Act, 1964 (Central Act 18 of 1964); (v)  a   corresponding   new   bank   constituted   under   section   3 of  the  Banking Companies  (Acquisition  and  Transfer of Undertakings) Act, 1970 (Central Act 5 of 1970);  11 (vi)  a   Regional   Rural   Bank   established   under   the   Regional Rural Banks Act, 1976 (Central Act 21 of 1976); (vii)  a   corresponding   new   bank   constituted   under   section   3 of   the   Banking   Companies   (Acquisition   and   Transfer of Undertakings) Act, 1980 (Central Act 40 of 1980);  (viii)  the   Export   Import   Bank   of   India   established   under   the Export   Import  Bank  of   India  Act, 1981,  (Central   Act   28 of 1981); (ix)   the National Bank for Agriculture and Rural Development established   under   the   National   Bank   for   Agriculture   and   Rural   Development   Act,   1981   (Central Act 61 of 1981); (x)    the Industrial Reconstruction Bank of India established under   the   Industrial   Reconstruction   Bank   of   India   Act, 1984 (Central Act 62 of 1984); 4.11   The   Banking   Regulation   Act,   1949   defines   a   “ banking company ” under Section 5(c) as follows:­ “ 5. Interpretation  –  xxx xxx xxx (c)   "banking   company"   means   any   company   which   transacts the business of banking in India; Explanation .   ­   Any   company   which   is   engaged   in   the manufacture   of   goods   or   carries   on   any   trade   and   which accepts   deposits   of   money   from   the   public   merely   for   the purpose   of   financing   its   business   as   such   manufacturer   or trader   shall   not   be   deemed   to   transact   the   business   of banking within the meaning of this clause;” 4.12   The   word   “ banking ”   itself   is   defined   in   Section   5 (b)   of   the Banking Regulation Act, 1949 as follows:­ 12 “ 5. Interpretation  –  xxx xxx xxx (b)   "banking"   means   the   accepting,   for   the   purpose   of lending   or   investment,   of   deposits   of   money   from   the public,   repayable   on   demand   or   otherwise,   and withdrawal by cheque, draft, order or otherwise ;” 4.13     By virtue of the definition of the word “ banking ” contained in Section 5(b) of the Banking  Regulation Act, 1949, an institution or business   entity   which   does   not   accept   deposits   of   money   from   the public,   either   for   the   purpose   of   lending   or   for   the   purpose   of investment,   will   not   be   a   banking   company.   While   a   banking company   may   be   involved   in   both   the   business   of   accepting deposits   and   lending   money,   a   financial   institution   which   is engaged only in the business of lending, may not be covered by the definition   of   the   expression   “ banking   company ”   under   the   Banking Regulation Act, 1949.  4.14   Since NBFCs which do not accept deposits from the public do not   come   within   the   purview   of   the   Banking   Regulations   Act,   the Reserve   Bank   of   India   Act,   1934   had   to   step   in.   To   make   things more   clear   that   there   is   no   duplication   of   control,   Section   45­H   of the   RBI   Act   states   that   the   provisions   of   Chapter   III­B   shall   not 13 apply to a Banking Company as defined in Section 5 of the Banking Regulation Act.  4.15     But   the   definition   of   “ money   lender ”   in   the   Kerala   Act excludes   only   a   “ bank ”   to   which   the   Banking   Regulation   Act applies .   It   does   not   exclude   a   non   banking   institution   from   the definition.   Therefore,   the   Kerala   State   authorities   started   claiming and   technically   rightly   so,   that   NBFCs   are   not   excluded   from   the definition of “ money   lender”.  Though the NBFCs claimed that under clause (f) of sub­section (7) of Section 2, “ any institution established by   or   under   an   Act   of   Parliament   or   the   Legislature   of   a   State”   are excluded   from   the   definition   of   the   expression   “ money­lender ”   and that NBFCs are established under a Parliamentary enactment, this argument was found by the State to be based on a convoluted logic. We also think that the State was right in thinking so, since   NBFCs are   not   established   by   or   under   an   Act   of   Parliament   or   the legislature of a State. Incorporation/registration of a business entity   under   an   Act   of   Parliament   or   the   Legislature   of   a State,   is   completely   different   from   being   established   by   or under an Act.   For instance, all companies are incorporated under 14 the   Companies   Act.   But   a   corporation   like   the   LIC   of   India,   is established   under   the   LIC   of   India   Act.   Therefore,   the   appellants were not right in claiming that they fall under the exclusion clause in   clause   (f)   of   sub­section   (7)   of   Section   2.   Keeping   this   aspect   in mind, let us now see the scheme of the Kerala Act.  4.16    The scheme of the Kerala Act is:­ (i) To   make   it   obligatory   for   a   money   lender   to   obtain   a licence under the Act; (ii) To   prohibit   any   person   from   carrying   on   or   continuing the business of money lending without licence; (iii) To prevent money lenders from charging interest at a rate higher than the rate prescribed under the Act; (iv) To   prevent   money   lenders   from   giving   any   gifts, commissions or presents other than the interest provided in Section 4(2) to any depositor; (v) To enable the debtor to deposit the money due in respect of a loan, into any Court having jurisdiction to entertain a suit for recovery of the loan and to seek the recording of full or part satisfaction of the loan; (vi) To  make  it mandatory  for   money   lenders    to  keep books of accounts and to give receipts; 15 (vii) To make it compulsory for a pawn broker to issue a pawn ticket,   the   possession   of   which   will   give   rise   to   a presumption   that   the   holder   of   the   pawn   ticket   has   a right to redeem the pledge; (viii) To prescribe the procedure for redemption of pledge, sale of pledge and compensation for depreciation of pledge; (ix) To   appoint   inspectors   with   certain   powers   of   inspection and search; (x) To empower the licensing authority to demand additional security   from   the   money   lender,   if   there   is   excess   of liabilities   over   the   assets   of   the   money   lenders   at   any time; and  (xi) Providing for cancellation of licence, forfeiture of security and imposing penalty for violation of the provisions of the Act. 5. Gujarat Act 5.1    The Gujarat Act defines a  “money lender” , in Section 2(10) to mean   “ an   individual,   a   HUF,   a   company,   a   pawn­broker   or unincorporated company (i) who/which carries on the business of   money   lending   in   the   State   or   (ii)   who/which   has   his principal or subsidiary place of such business in the State” .  16 5.2         The   expression   “ business   of   money   lending ”   is   defined   in Section 2(3) to mean “ the business of advancing loans, whether in   cash   or   kind   and   whether   or   not   in   connection   with   or   in addition   to   any   other   business   and   includes   the   business   of payment  of loan by an  agreement under any law for the time being in force ”. 5.3   By   virtue   of   the   aforesaid   definitions,   the   application   of   the Gujarat   Act   to   any   business   entity/individual   revolves   around   the definition of the word “ loan ”. It is defined in Section 2(9) as follows: “loan”   means   an   advance   whether   of   money   or   in   kind,   at   an interest, with or without security, and includes advance, discount, money paid for or on account of or on behalf of or at the request of any   person,   or   the   forbearance   to   require   payment   of   money owing   on   any   account   whatsoever,   and   every   agreement   under any   law   for   the   time   being   in   force   (whatever   its   terms   or   form may be) which is in substance or effect a loan of money, but does not include –  (a)   a   deposit   of   money   or   other   property   in   a   Government   post office, a bank, a company or a co­operative society;  (b)   a   loan   to,   or   by,   or   a   deposit   with   any   society   or   association registered under the Societies Registration Act, 1860, or any other enactment relating to a public, religious or charitable object;  (c)   a   loan   advanced   by   the   State   Government   or   by   any   local authority authorized by the State Government;  17 (d)   a   loan   advanced   to   a   Government   employee   from   a   fund, established   for   the   welfare   or   assistance   of   Government employees and which is sanctioned by the State Government;  (e)  a deposit  of money with or a loan advanced  by a cooperative society;   (f)   an   advance   made   to   a   subscriber   to,   or   a   depositor   in,   a provident fund from the amount standing to his credit in the fund in accordance with the rules of the fund;  (g)   a   loan   to   or   by   an   insurance   company   as   defined   in   the Insurance Act, 1938;  (h) a loan advanced by a Government company as defined in the Companies Act, 1956;  (i)   an   advance   made   bona   fide   by   any   trader   carrying   on   any business,   other   than   money­lending,   if   such   advance   is   made   in the regular course of such business;  (j)   a   loan   advanced   by   the   National   Bank   for   Agriculture   and Rural   Development   established   under   the   National   Bank   for Agriculture and Rural Development Act, 1981;  (k)   a   loan   advanced   by   the   Export­Import   Bank   of   India established under the Export­Import Bank of India Act, 1981;  (l) a loan advanced by the Small Industries Development Bank of India, established  under the  Small Industries  Development Bank of India Act, 1989;  (m)   a   loan   advanced   by   the   National   Housing   Bank,   constituted under the National Housing Bank Act, 1987 ;  (n)   a   loan   advanced   by   State   Financial   Corporations   established under the State Financial Corporations Act, 1951 ; and  (o)   a   loan   advanced   by   any   institution   ­   (1)   established   by   or under   an   Act   of   Parliament   or   the   legislature   of   a   State,   which grants any loan or advance in pursuance of the provisions of that Act,   or   (2)   notified   in   this   behalf   by   the   State   Government,   in consultation with the Reserve Bank;       18 5.4 By virtue of the aforesaid definitions, the authorities under the Gujarat Act sought to apply the provisions of the Act to NBFCs also. Therefore, it is essential that we look at the scheme of the Act. 5.5 The broad scheme of the Gujarat Act is : (i) To provide for the registration of money lenders; (ii) To  prohibit  any  person  from  carrying  on   the  business  of money lending without a valid certificate of registration in respect of the area concerned; (iii)  To   empower   the   Registrar   General,   Registrar   and   other officers   appointed   under   the   Act   to   require   the production   of   records   and   documents   and   to   carry   out searches and seizures; (iv) To   mandate   every   money   lender   to   keep   and   maintain proper books of Accounts and other registers; (v) To   make   it   obligatory   for   money   lenders   to   file   yearly statement of accounts of each of the debtors; (vi) To  prohibit  the disposal  of  any  article taken by  a  money lender from a debtor as a bond, pledge or security for the loan   advanced,   for   a   period   of   two   years   from   the   date stipulated for financial repayment of the loan; 19 (vii) To   regulate   the   powers   of   the   Civil   Court   while   deciding the   suits   to   which   the   Act   applies,   so   that   the   Court   is satisfied that the provisions of the Act are complied with; (viii) To   curtail   the   power   of   the   Court   to   award   interest   in   a sum   greater   than   the   principal   of   the   loan   due   on   the date of the decree; (ix) To   empower   the   Court   to   allow   payment   of   the   decretal amount by instalments; (x) To empower the Court even to reopen past transactions; (xi) To   enable   the   borrower   to   deposit   the   amounts   due   in respect of a loan into Court; (xii) To   empower   the   State   Government   to   fix   the   maximum rate of interest, for any local area or class of business; (xiii) To prohibit money lenders from receiving from the debtor, any amount by way of costs, charges or expenses; (xiv) To   make   it   obligatory   for   the   money   lender   to   provide advance information, whenever  the loan  is assigned to a third party; (xv) To prohibit money lenders from accepting any promissory note, acknowledgment, bond or other writing which does not   state   the   actual   amount   of   loan   or   which   states   the amount   wrongly   or   which   contains   erasures   or   over­ writing; and (xvi) To   provide   for   penalties   for   contravention   of   the provisions of the Act. 20 5.6 It may be of interest to note that Section 39 of the Gujarat Act contains a very strange provision which reads as follows:­ “Notwithstanding anything contained in this Act or any other law for the time being in force, no money lender shall recover the   principal   of   the   loan   advanced   by   him   or   the   interest thereon either in part or in whole except in cash.” 5.7 Though   we   are   not   concerned   with   the   validity   of   such   a provision we could not resist the temptation to take note of the said provision which is in the teeth of Section 269­SS of the Income Tax Act, 1961. 6. Role   of   RBI,   the   scheme   of   Chapter   III­B   of   the   RBI   Act and the Regulatory measures taken by RBI from time to time   6.1     As   observed   by   this   Court   in   Internet   and   Mobile Association   of   India   vs.   Reserve   Bank   of   India 1 ,   “the   role   of   a Central   Bank   such   as   the   Reserve   Bank,   in   an   economy,   is   to manage   (i)   the   currency;   (ii)   the   money   supply   and   (iii)   interest rates”.   One   of   the   objects   the   Reserve   Bank   of   India   Act,   1934   as spelt   out   in   its   preamble   is   “ to   operate   the   currency   and   credit system of the country to its advantage ”. 1 (2020) 10 SCC 274 21 6.2     Therefore,   in   contrast   to   the   state   enactments   regulating   the business   of   money   lending,   whose   one­eyed   focus   is   only   the protection of borrowers, the RBI Act takes a holistic approach to the business  of  banking,  money   lending  and  operation  of  the  currency and   credit   system   of   the   country.   But   when   RBI   Act   was   enacted, the   business   of   banking   and   finance   was   not   as   complicated   as   it later turned out to be. 6.3 In   the   early   1960s,   the   Government   found   it   necessary   to regulate   institutions   which   were   not   banks,   but   which   were carrying   on   other   businesses   allied   to   banking.   Therefore,   a   bill   to amend   the   RBI   Act,   The   Banking   Companies   Act,   1949,   and   the State Bank of India (Subsidiary Banks) Act, 1959 was introduced in November,   1963.   The   Statement   of   Objects   and   Reasons   spelt   out that   the   existing   enactments   relating   to   banks   did   not   provide   for any   control   over   such   banks   or   institutions   and   that   therefore   it was   felt   necessary   that   the   RBI   should   be   enabled   to   regulate   the conditions   on   which   deposits   may   be   accepted   by   non­banking companies   or   institutions,   for   the   purposes   of   ensuring   more effective   supervision   and   management   of   the   monetary   and   credit 22 system by the Reserve Bank.  One of the important objects spelt out in the Statement of Objects and Reasons reads as follows:­ “The   Reserve   Bank   should   also   be   empowered   to   give   to   any financial   institution   or   institutions   directions   in   respect   of matters,   in   which   the   Reserve   Bank,   as   the   central   banking institution   of   the   country,   may   be   interested   from   the   point   of view of the control of credit policy” Clause   (5)   of   the   Notes   on   Clauses   accompanying   the   Bill   read   as follows:­ “ Clause 5 .­A new Chapter is proposed to be introduced in the Reserve   Bank   of   India   Act   for   enabling   that   bank   to   obtain returns and information from (a) certain financial institutions, namely, firms, companies or other bodies corporate which are financing   trade,   industry,   commerce   or   agriculture,   or   are carrying   on   as   a   part   of   their   business   the   acquisition   of shares,   stocks,   bonds,   debentures   or   other   securities,   or   are engaged mainly in the financing of hire­purchase transactions and   (b)   non­banking   institutions   accepting   deposits   from members   of   the   general   public.     The   objects   in   view   are   to provide for­ (i) the   supervision   and   control   of   the   financial   institutions mentioned above in the interests of better or  more effective control of credit, and (ii) the regulation of the business of acceptance   of deposits by these and other non­banking institutions,  in the public interest. The Reserve Bank will be empowered to provide, by general or   special   order,   for   the   forms   in   which   returns   and information   are   to   be   furnished   to   it,   and   also   to   give directions to any class of institutions or to any institution in particular for the purposes specified.  The Reserve Bank will also   be   enabled   to   carry   out   inspections,   where   necessary, for carrying out the purposes of the new Chapter.” 23 6.4 Accordingly, the Banking Laws (Miscellaneous Provisions Act), 1963,  was  enacted,  amending   the  provisions  of  the  aforesaid  three Parliamentary   enactments.   It   was   by   this   amendment   which   came into force on 01.02.1964 that Chapter III­B was inserted in RBI Act. The Chapter  heading  for  this  Chapter  read as, “ Provisions  Relating to   Non­Banking   Institutions   Receiving   Deposits   and   Financial Institutions ”.   However,   this   Chapter   III­B   was   made   inapplicable under  Section  45­H to   a  banking  company   as defined  in  Section  5 of   the   Banking   Companies   Act,   1949.   Section   45­I   defined   a ‘ financial   institution ’   under   clause   (c)   to   mean   any   non­banking institution   which   carries   on   the   business   of   financing   or   the business   of   acquisition   of   shares,   stocks   etc.,   or   the   business   of hire­purchase transactions. 6.5 Chapter   III­B   as   it   was   introduced   by   the   Banking   Laws (Miscellaneous Provisions Act), 1963, contained no spell­binding or path­breaking provisions. Broadly, Chapter III­B as it was originally introduced   in   1963,   (i)   empowered   RBI   to   regulate   or   prohibit   the issue   of   prospectus   or   advertisement   soliciting   deposits   of   money; (ii)   empowered   the   RBI   to   collect   information   from   non­banking 24 institutions   about   deposits   and   to   give   directions;   (iii)   empowered the RBI to call for information from financial institutions and to give directions,   for   the   purpose   of   regulating   the   credit   system   of   the country;   (iv)   obliged   the   non­banking   institutions   to   furnish statements   to   the   RBI;   (v)   provided   for   inspection   by   RBI;   (vi) prescribed penalties for any violation and conferred overriding effect to Chapter III­B over other laws.  6.6 After   the   introduction   of   Chapter   III­B   under   Act   55   of   1963, three   amendments   which   are   not   relevant   for   our   purpose,   were made to the provisions contained in Chapter III­B, under Act 51 of 1974, Act 21 of 1976 and Act 1 of 1984. 6.7 Post   the   insertion   of   Chapter   III­B   under   Act   55   of   1963,   the working   of   non­banking   financial   intermediaries   came   to   be reviewed   by   two   study   groups,   one   under   the   chairmanship   of   Dr. Bhabhatosh Datta in 1971 and another under the chairmanship of Shri   James   Raj   in   1975.   Certain   recommendations   were   made   by these   two   study   groups.   Thereafter,   the   issue   was   considered   by three   other   committees   namely,   (i)   the   Committee   to   Review   the Working   of   the   Monetary   System   (Chakravarty   Committee­1985); 25 (ii)   the   Working   Group   on   the   Money   Market   (Vaghul   Committee­ 1987);   and   (iii)   the   Committee   on   the   Financial   System (Narasimham Committee­1991). 6.8 Those reports and various socio­economic and political factors led to the liberalisation of the economy in 1991. The liberalisation of the   economy   saw   the   growth   of   non­banking   financial   services sector   in   India   accompanied   by   a   corresponding   growth   in   the number   of   NBFCs   offering   a   diversified   range   of   financial   services and   products.   Therefore,   a   need   was   felt   for   rationalisation   of   the regulatory framework for these companies keeping in view the trend towards liberalisation of economy in general and the financial sector in   particular.   In   order   to   make   an   in­depth   study   of   the   role   of NBFCs   and   to   suggest   regulatory   and   control   measures   to   ensure healthy growth and operations of these companies, RBI constituted a   Working   Group   under   the   Chairmanship   of   Dr.   A.C.   Shah,   in May, 1992. The terms of reference of the Working  Group in simple terms 2  were:­ 2 Report of the Working Group on Financial Companies C.R. 483 submitted in September,  1992 26 (i) To   review   the   role   of   various   categories   of   non­banking financial intermediaries; (ii) To   review   the   provisions   of   the   RBI   Act,   1934;   Non­ Banking   Financial   Companies   (Reserve   Bank)   Directions 1977,   Miscellaneous   Non­Banking   Companies   (Reserve Bank)   Directions,   1977;   Residuary   Non­Banking companies (Reserve Bank) Directions, 1987; The National Housing   Bank   Act,   1987   and   The   Housing   Finance Companies (NHB) Directions, 1989; (iii) To enquire into the methods of operation of non­banking financial intermediaries and to recommend measures for ensuring   their   orderly   growth   and   in   particular,   the eligibility   criteria   for   their   entry,   growth   and   exit,   their viability,   capital   adequacy,   liquidity   ratio,   debt   equity ratio,  credit concentration ratio,  disclosure  requirements and other prudential norms; (iv) To  consider  the  adequacy   of  the  supervision   and  control of   RBI   over   such   institutions   and   suggest   measures   for further strengthening them; (v) To   examine   the   adequacy   of   protection   to   depositors’ money; and (vi) To make recommendations on any other related matter. 27 6.9 The Working Group chaired by Dr. A.C. Shah, took note of the fact   that   the   total   number   of   NBFCs   which   stood   at   7063   in   1981 increased to 24,009 by 1990 and that there were different categories of   NBFCs   operating   in   the   country   such   as   loan   companies, investment companies, hire­purchase finance companies, equipment leasing   companies,   mutual   benefit   finance   companies, miscellaneous   finance   companies,   miscellaneous   non­banking companies,   residuary   non­banking   companies   and   housing   finance companies.   This   Working   Group   actually   recommended   in paragraph   6.72   of   its   Report   that   though   NBFCs   were   being regulated by the directions issued under Chapter III­B of the RBI Act and Chapter­V of the NHB Act, it would be better to enact a separate legislation. The Working Group went to the extent of recommending that   such   a   legislation   should   be   put   under   Schedule   IX   of   the Constitution. 6.10 All   the   above   led   to   the   promulgation   of   the   Reserve   Bank   of India   (Amendment)   Ordinance,   1997   on   09.01.1997.   Subsequently, a   bill   was   introduced   which   became   the   Reserve   Bank   of   India (Amendment) Act, 1997. This Act completely revamped Chapter III­B 28 by   amending   the   definition   provision   in   Section   45­I   and   inserting certain   new   provisions   such   as   Section   45­IA,   45­IB,   45­IC,   45­JA, 45­MB,   45­MC   etc.   After   the   amendment   made   to   Chapter   III­B   by Act 23 of 1997, this Chapter has become a complete Code in so far as   NBFCs  are  concerned.  This   can  be  seen   from  various   provisions of Chapter III­B, which is summarized in the form of a table for easy reference as follows:­ PROVISION REQUIREMENT Section 45­ IA (i)         Certificate   of   Registration   mandatory   for   a NBFC   to   commence   or   carry   on   the   business   of   a non­banking financial institution. (ii)    Such NBFC should have a net­owned fund of Rs.25   lakhs   or   such   other   amount   not   exceeding Rs. 100 crores, as the RBI may prescribe. (iii)         The   application   for   registration   shall   be considered   by   RBI   subject   to   certain   parameters prescribed in sub­section (4) Section 45­IB (i)         NBFCs   have   to   invest   in   un­encumbered approved securities, such amount which shall not be   less   than   5%   or   such   higher   percentage   not exceeding 25% prescribed by RBI. (ii)       Every NBFC should furnish a return to RBI, so   as  to   ensure   compliance   with  the   provisions   of this Section. (iii)    Penal interest is liable to be levied if there  was a shortfall in the investment. Section 45­IC (i)     Every NBFC should create a reserve fund and transfer to the said fund a sum not less than 20% of   its   net   profit   every   year.   No   part   of   the   reserve 29 fund shall be appropriated by the NBFC except for a purpose stipulated by RBI. Section 45­ID (i)         RBI   is   entitled   to   remove   the   Director   of   an NBFC   from   office,   if   it   is   satisfied   that   it   is necessary to do so in public interest or to prevent the affairs of a NBFC being conducted in a manner detrimental   to   the   interest   of   the   depositors   or creditors   or   financial   stability   or   for   securing   the proper management of such company. Section 45­IE (i)     RBI will have the power of supersession of the Board of Directors of a NBFC in public interest etc. Section 45­J (i)    RBI will have the power to regulate or prohibit the issue of prospectus or advertisement soliciting deposits of money. Section­45JA (i)      In  public   interest   or   for   the  regulation  of  the financial system of the country to its advantage or to   prevent   the   affairs   of   any   NBFC   being conducted in a manner prejudicial to the interest of   the   depositors   or   prejudicial   to   the   interest   of the NBFC, RBI may  determine the policy and give directions.  Section 45­K (i)  RBI may demand every non­banking institution to   furnish   such   statements   of   information   or particulars   relating   to   or   connected   with   the deposits received by the NBFCs. Section 45­L (i)   RBI   will   have   the   power   to   require   financial institutions   to   furnish   such   statements, information or particulars relating to the business of   such   financial   institutions   and   to   give   such directions. Section 45­M (i)     It shall be the duty of every NBFC to furnish the   statements,   information   or   particulars   called for   and   to   comply   with   any   direction   issued   by RBI. Section 45­MA  RBI will have the power to issue directions to the Auditors   of   NBFCs   relating   to   balance­sheet, profit and loss account, disclosure of liabilities in 30 the books of accounts or any other matter. Section 45­ MAA  RBI can take action against the Auditors who fail to comply with any of the directions. Section 45­MBA   RBI   may   frame   schemes   providing   for   the amalgamation of NBFCs or the reconstruction of a NBFC   etc.,   if   RBI   is   satisfied   upon   inspection   of the books of accounts that it is in public interest or in the interest of financial stability to do so. Section 45­MC RBI will be entitled to move an application for the winding   up   of   an   NBFC,   under   certain circumstances. Section 45­N  Power of inspection. Section 45­NAA   RBI   may   at   any   time   direct   a   NBFC   to   annex   to its   financial   statements,   such   statements   and information   relating   to   the   business   or   affairs   of any group company of NBFC. Section 45­NC RBI   may   exempt   a   NBFC   from   the   application   of any or all of the provisions of Chapter III­B 6.11      The above scheme of Chapter III­B of the RBI Act shows that the  power  of  intervention  available  for   the RBI   over   NBFCs, is from the   cradle   to   the   grave.   In   other   words,   no   NBFC   can   carry   on business without being registered under the Act and a NBFC which takes birth with the registration under the Act is liable to be wound up   at   the   instance   of   the   RBI.   The   entire   life   of   a   NBFC   from   the womb to the tomb is also regulated and monitored by RBI.   31 6.12  At this juncture it may be ideal to extract some of the relevant provisions of Chapter III­B. 6.13     A   Non­banking   financial   company   is   defined   in   clause   (f)   of Section 45­I as follows:­ “45­I.   (f) “non­banking financial company” means – (i) a financial institution which is a company; (ii) a non­banking institution which is a company and   which   has   as   its   principal   business   the receiving   of   deposits,   under   any   scheme   or arrangement   or   in   any   other   manner,   or lending in any manner; (iii) such other non­banking institution or class of such   institutions,   as   the   Bank   may,   with   the previous   approval   of   the   Central   Government and   by   notification   in   the   Official   Gazette, specify.” 6.14      Section 45­JA which gives power to the RBI to determine the policy and issue directions, reads as follows:­ “45JA.   Power   of   Bank   to   determine   policy   and   issue directions .   ­­   (1)   If   the   Bank   is   satisfied   that,   in   the   public interest or to regulate the financial system of the country to its   advantage   or   to   prevent   the   affairs   of   any   non­banking financial company being conducted in a manner detrimental to the interest of the depositors or in a manner prejudicial to the   interest   of   the   non­banking   financial   company,   it   is necessary or expedient so to do, it may determine the policy and give directions to all or any of the non­banking financial companies   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 balance­sheet items and also relating   to   deployment   of   funds   by   a   non­banking   financial company   or   a   class   of   non­banking   financial   companies   or 32 non­banking financial companies generally, as the case may be,   and   such   non­banking   financial   companies   shall   be bound to follow the policy so determined and the direction so issued. (2)  Without prejudice to the generality of the powers vested under sub­section (1), the Bank may give directions to non­banking   financial   companies   generally   or   to   a   class   of non   banking   financial   companies   or   to   any   non­banking financial company in particular as to­­ (a) the   purpose   for   which   advances   or   other   fund based   or   non­fund   based   accommodation   may not be made; and (b) the   maximum   amount   of   advances   or   other financial   accommodation   or   investment   in shares and other securities which, having regard to   the   paid­up   capital,   reserves   and   deposits   of the   non­banking   financial   company   and   other relevant   considerations,   may   be   made   by   that non­banking financial company to any person or a company or to a group of companies.” 6.15      Section 45­K which empowers the RBI to collect information reads as follows:­ “ 45K.   Power   of   Bank   to   collect   information   from   non­ banking   institutions   as   to   deposits   and   to   give directions . –  (1) The Bank may at any time direct that every non­banking 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   non­banking   institution,   as   may   be   specified   by   the Bank by general or special order. (2)  Without prejudice  to  the  generality  of  the  power vested   in   the   Bank   under   sub­section   (1),   the   statements, information or particulars to be furnished under sub­section (1), may relate to all or any of the following matters, namely, the   amount   of   the   deposits,   the   purposes   and   periods   for 33 which,   and   the   rates   of   interest   and   other   terms   and conditions on which, they are received. (3)   The   Bank   may,   if   it   considers   necessary   in   the public   interest   so   to   do,   give   directions   to   non­banking institutions   either   generally   or   to   any   non­banking institution   or   group   of   non­banking   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   non­banking   institution   fails   to   comply with  any  direction given  by  the  Bank  under  sub­section  (3), the   Bank   may   prohibit   the   acceptance   of   deposits   by   that non­banking institution. 1 [***] (6)  Every non­banking institution receiving deposits shall, if so required by the Bank and within such time as the Bank   may   specify,   cause   to   be   sent   at   the   cost   of   the   non­ banking   institution   a   copy   of   its   annual   balance­sheet   and profit   and   loss   account   or   other   annual   accounts   to   every person from whom the non­banking  institution holds, as on the   last   day   of   the   year   to   which   the   accounts   relate, deposits   higher   than   such   sum   as   may   be   specified   by   the Bank.” 6.16    Section 45­L empowers RBI to call for information and to give directions. It reads as follows:­ “45L.   Power   of   Bank   to   call   for   information   from financial   institutions   and   to   give   directions .­­(1)   If   the Bank   is   satisfied   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)  require   financial   institutions   either   generally   or any  group   of   financial   institutions   or   financial institution   in particular, to furnish to the Bank in such form, at such intervals and within such time,   such   statements,   information   or particulars   relating   to   the   business   of   such financial   institutions   or   institution,   as   may   be 34 specified   by   the   Bank   by   general   or   special order; (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.           (2)  Without prejudice  to  the  generality  of  the  power vested   in   the   Bank   under   clause   (a)   of   sub­section   (1),   the statements,   information   or   particulars   to   be   furnished   by   a financial institution  may  relate  to  all  or  any  of  the  following matters,   namely,   the   paid­up   capital,   reserves   or   other liabilities, the investments whether in Government securities or   otherwise,   the   persons   to   whom,   and   the   purposes   and periods   for   which,   finance   is   provided   and   the   terms   and conditions,   including   the   rates   of   interest,   on   which   it   is provided.          (3)   In issuing directions to any financial institution under clause (b) of sub­section (1), the Bank shall have due regard to the conditions in which, and the objects for which, the   institution   has   been   established,   its   statutory responsibilities,   if   any,   and   the   effect   the   business   of   such financial institution is likely to have on trends in the money and capital markets.” 6.17       One   of   the   most   important   provisions   contained   in   Chapter III­B is Section 45­Q. It reads as follows:­ “45Q.   Chapter   IIIB   to   override   other   Laws .—The provisions   of   this   Chapter   shall   have   effect   notwithstanding anything   inconsistent   therewith   contained   in   any   other   law for the time being in force or any instrument having effect by virtue of any such law.” 6.18     It is too long in the day to dispute the fact that the directions issued by RBI are statutory in character and binding on all NBFCs. 35 It   is   so,   in   respect   of   the   directions   issued   both   under   the   RBI   Act and under the Banking Regulation Act.   6.19       Once   it   is   found   that   Chapter   III­B   of   the   RBI   Act provides   a   supervisory   role   for   the   RBI   to   oversee   the functioning   of   NBFCs,   from   the   time   of   their   birth   (by   way   of registration) till the time of their commercial death (by way of winding up),  all activities  of NBFCs  automatically come under the   scanner   of   RBI.   As   a   consequence,   the   single   aspect   of taking care of the interest of the borrowers which is sought to be   achieved   by   the   State   enactments   gets   subsumed   in   the provisions of Chapter III­B. Regulations/Master   Circulars/Directions   issued   by   RBI   from time to time 6.20     Apart   from   the   provisions   of   Chapter   III­B,   the   regulations, directions   and   Master   Circulars   issued   by   RBI   from   time   to   time, also bind the NBFCs. There is a long list of Regulations/directions or Master   Circulars   issued   by   RBI   from   1977   onwards,   which   shows that even before the 1997 Amendment to the RBI Act, some kind of 36 control   was   exercised   by   RBI   over   NBFCs.   After   the   1997 amendment, every aspect of the business of NBFCs, including loans, is   covered   by   Master   Circulars/   Directions   issued   by   RBI.   In   other words,   the   only   field   occupied   by   the   State   enactments   stand appropriated by the Master Circulars/Directions. For demonstrating that   even   the   subject   of   grant   of   loans   is   covered   by   these   Master Circulars/Directions,   we   present   in   the   Table   below,   the   relevant circulars/directions. Title   of     the Circular/ directions The   provision under   which it was issued Subject   matter   in   general and   provision   dealing   with loans and rate of interest Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions 2007 Section 45JA General policy including loans Clause 7: Need for Policy on Demand/ Call Loans Board to frame policy with respect to  Cut off date for repayment or call up  Rate of interest  Reasons in writing for effecting Moratorium and sanctioning interest free loans Revisions on the Guidelines of Securitisation Transactions incorporated in the Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 Sections 21 and 35A of the Banking Regulation Act, 1949; Chapter IIIB of the Reserve Bank of India Act, 1934 Securitisation of Standard Assets Clause 1.2: Minimum Holding Period  Loans to be securitised only after minimum holding period Clause 1.3: Minimum Retention Requirement (MRR)  NBFC to have continued stake in performance of securitised asset to ensure proper due diligence of 37 sanctioned loans Master Circular- Fair Practices Code , 2014 General Fair Practices Guidelines including in loan appraisal and disbursement Clause 2A(ii): Loan Appraisal and Terms and Conditions:  Sanction letter to contain loan amount and annualised Rate of Interest in vernacular language.  NBFCs shall mention the penal interest so charged on late repayment in bold in loan agreement. Clause 2A(iii): Disbursement of loans including changes in terms and conditions  NBFC to give notice of any change in terms of a loan including disbursement schedule, rate of interest etc in vernacular.  NBFCs should effect change in rate of interest prospectively only. Clause 2A(viii): Regulation of excessive interest charged by NBFCs  Board of each NBFC to adopt an interest rate model taking into account cost of funds, margin, risk premium etc. Rate of interest and the approach for gradations of risk and rationale for charging different rates of interest for different categories of borrowers shall be disclosed to the borrower and communicated explicitly in the sanction letter. Non-Banking Financial Company - Non-Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 Sections 45JA, 45L and 45M of the RBI Act Chapter IV: Prudential Regulations Clause 11: Need for policy on demand/call loans :  Board of Directors shall frame policy for applicable NBFCs which stipulate: 1. Cut-off date for repayment of 38 And Non-Banking Financial Company-Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 demand or call loan shall be demanded with reasons in writing if the cut-off date extends beyond a period of 1 year from date of sanction. 2. Rate of interest which shall be payable on such loans. Such interest shall be payable either at monthly or quarterly rests. Reasons in writing if moratorium is granted or no interest is stipulated. Chapter V: Fair Practices Code for applicable NBFC Clause 28: Applications for loans & their processing  Communications to borrower to be in vernacular language/language understood by them.  Loan application forms to include necessary information which affects interest of the borrower & to indicate documents required to be submitted.  To devise a system of giving acknowledgement for receipt of all loan applications with time frame within which applications will be disposed of. Clause 29: Loan Appraisal & Terms/Conditions  Communication regarding amount of loan sanctioned along with T&C including annualised rate of interest & method of application etc. in vernacular language to the borrower. Interest rate will have to be clearly specified.  Not furnishing a copy of loan 39 agreement is unfair practice. Clause 36: Regulation of excessive interest charged by applicable NBFC  Board of NBFCs shall adopt interest rate model accounting for relevant factors: cost of funds, margin & risk premium & determine rate of interest to be charged for loans & advances etc.  Explicit reasons to be given for different rates of interest to different categories of borrowers. Clause 37: Complaints about excessive interest charged by Applicable NBFCs Board of NBFCs shall lay out appropriate internal principles & procedures in determining interest rates & processing and other charges Non-Banking Financial Company-Housing Finance Company Directions 2021 Section 45L, Section 45MA of RBI Act Regulation of excessive interest on loans (Clause 80 and 81) i) Rate of interest on loans to be made available on company website as an annualised rate. ii) Board to adopt interest rate model taking account of cost of funds, margin, risk premium etc iii) Company to place internal mechanism to monitor fixing rate of interest. The chapter pertaining to ‘Fair Practices’ shall be applicable to interest on loans. RBI (Regulatory Framework for Microfinance Loans) Directions 2022 Section 21, Section 35A and Section 56 of the Banking Regulation Act, 1949; Chapter IIIB of the Reserve Bank of India Act, 1934 Pricing of loans (Clause 6) : i) policy containing well-documented interest rate model including factors such as risk premium, margin, a ceiling applicable to microfinance loans etc ii) Rate of interest not to be usurious. This shall be subject to scrutiny by RBI iii) change in rate of interest to be informed to borrower well in advance Ombudsman Scheme for NBFC- 2018 Section 45L Rule 8 empowers any person to file a complaint with the Ombudsman for the 40 grounds mentioned in the rule. The procedure for filing a complaint is given in Rule 9. Rule 11 provides for settlement of the complaint by agreement between the parties. Rule 12 provides for the alternative where if the complaint is not settled by agreement, the Ombudsman can pass an award. Rule 14(4) also mandates that the NBFC must implement the award and send a report of the same to RBI within 15 days of the award becoming final Since   the   Regulations,   Master   Circulars   and   Directions   issued   by RBI are binding on NBFCs, it is clear from the above that all aspects of   NBFCs   are   regulated   by   RBI   and   nothing   is   left   untouched. However,   there   are   certain   categories   of   NBFCs,   which   may   be exempt,   by   RBI   itself,   in   exercise   of   the   power   conferred   by   section 45­NC  of the Act, from the application of the provisions of RBI  Act. Let us also take note of them now. NBFCs  Exempt from RBI Act  6.21    Section 45­NC of the RBI Act confers power upon the RBI to declare by notification in the Official Gazette, that any or all of the provisions of Chapter III­B shall not apply to a NBFC or any class of NBFCs,   either   generally   or   for   a   specified   period,   subject   to   such 41 restrictions, limitations and conditions. In exercise of the power  so conferred,   RBI   has   been   issuing   Master   Directions   from   time   to time. A Master Direction issued on 25.08.2016, updated as on April 01,   2022   lists   various   categories   of   NBFCs   exempt   from   the application   of   certain   specified   provisions   of   Chapter   III­B.   This   is for   the   reason   that   some   of   those   exempted   companies   are regulated by other regulatory bodies. For instance, Housing Finance Institutions are regulated by the National Housing Bank; Merchant Banking companies, Venture Capital Fund Companies and the like are   regulated   by   SEBI;   Nidhi   companies   and   mutual   benefit companies   are   regulated   by   the   Ministry   of   Corporate   affairs;   Chit Fund   companies   are   regulated   by   State   Governments;   and Insurance Companies are regulated by IRDA. We are not concerned in this case with the exempted companies, as the dispute on hand is confined only to NBFCs registered under the RBI Act. Is Chapter III­B a complete code? 7. To   find   out   whether   NBFCs   registered   under   Chapter   III­B   of the   RBI   Act   and   regulated   by   RBI   could   still   be   controlled   by   the State   enactments,   because   of   the   definition   of   the   expression 42 “ money   lender ”,   we   may   first   have   to   see   whether   Chapter   III­B   of the   RBI   Act   is   a   complete   code   or   not.   In   Integrated   Finance Company   Limited   vs.   Reserve   Bank   of   India   and   Others 3 ,   this Court held in para 47 of the Report that “ Chapter III­B of the RBI Act is a complete code in itself”. 7.1 We   have   seen   that   no   NBFC   can   commence   or   carry   on business  without  obtaining  the  certificate  of  registration  under   the Act.   We   have   also   seen   that   their   continuation   in   business   would depend   upon   compliance   with   certain   prescriptions   found   in   the RBI  Act as well as the circulars/directions  issued by  RBI. The RBI has   the   power  to   supersede   the   Board   of   Directors   of   a   NBFC  and has   power   even   to   wind   up   a   NBFC.   Thus   the   supervision   and regulation   of   NBFCs,   by   the   RBI,   is   from   the   time   of   birth   till   the time   of   death.   If   a   statutory   enactment   which   provides   for   such   a type of control and  supervision is not  a complete code in itself, we do not know what else could be a complete code. 7.2 It   was   argued   by   Mr.   Jaideep   Gupta,   learned   senior   counsel appearing   for   the   State   of   Kerala   that   the   Reserve   Bank   of   India 3    (2015) 13 SCC 772 43 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.   According   to   the   learned   senior   counsel,   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. Reliance was placed by  the  learned senior   counsel   in   this   regard   on   a   Constitution   Bench   decision   of the Supreme Court in  Deep Chand  vs.  State of U.P 4 . 7.3     But   we   do   not   agree.   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. 4   AIR 1959 SC 648 44 7.4 It may be true that many times RBI may not be controlling the rate of interest charged by NBFCs on the loans advanced by them. It does not mean that they have no power to step in. The power to determine   policy   and   issue   directions,   available   under   Section   45­ JA can always be invoked by RBI. 7.5 However,   it   was   contended   by   Mr.   Jaideep   Gupta,   learned senior   counsel   for   the   State   of   Kerala   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   balance­sheet   items   and   also relating to deployment of funds ”.  7.6 But   we  do  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 45 reason   that   the   power   conferred   by   Section   45­JA   is   both   for determining the policy and for issuing directions. 7.7 Moreover, Sub­section (1) of Section 45­JA deals only with the powers   in   general.   This   is   made   clear   by   the   words   “ without prejudice   to   the   generality   of   the   powers   vested   under   sub­Section (1) ”, appearing in sub­Section (2) of Section 45­JA. 7.8 In   any   case,   Section   45L(1)(b)   confers   power   upon   the   RBI   to give   directions   to   NBFCs   “ relating   to   the   conduct   of   business   by them ”.   Therefore,   to   say   that   RBI   has   no   power   in   respect   of   such an important aspect, may not be correct. The fact that RBI generally leaves   it   to   the   market   forces   to   determine   the   rate   of   interest, without   any   direct   intervention,   is   not   something   that   could   be taken   advantage   of   by   the   State   of   Kerala   to   step   in  and   prescribe the   maximum   rate   of   interest   chargeable   by   NBFCs   on   the   loans advanced by them. 7.9   In  Deep Chand  (supra), the Constitution Bench of this Court reiterated   three   important   tests   of   inconsistency   or   repugnancy, namely,   (i)   whether   there   is   direct   conflict   between   the   two 46 provisions;   (ii)   whether   Parliament   intended   to   lay   down   an exhaustive Code in respect of the subject matter replacing the Act of the State legislature; and   (iii)   whether the law made by Parliament and   the   law   made   by   State   legislature   occupy   the   same   field. Therefore, more than supporting the case of the State,  Deep Chand (supra) actually supports the case of the NBFCs, as we have found that Chapter III­B is a complete code in itself. Doctrine of Eclipse, conflict and repugnancy 8. As   indicated   by   the   Constitution   Bench   in   Deep   Chand (supra),   a law may be valid when made, but a shadow may be cast   on   it   by   supervening   constitutional   inconsistency   or supervening   existing   statutory   inconsistency .   Assuming   that the   Kerala   Act   was   valid   in   its   application   to   NBFCs   when   it   was made,   on   the   ground   that   the   business   of   money   lending   is traceable   to   Entry   30   of   List   II,   it   has   to   give   way   for   the parliamentary   enactment.   The   moment   the   Parliament   stepped in to codify the law relating to registration and regulation of NBFCs,   by   inserting   certain   provisions   in   Chapter   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. 8.1 In  Innoventive Industries Limited  vs.  ICICI Bank and Anr . 5 , this   Court   was   concerned   with   a   professed   conflict   between   the Insolvency and Bankruptcy Code, 2016 and the Maharashtra Relief Undertakings   (Special   Provisions)   Act,   1958.   After   taking   note   of Section 107 of the Government of India Act, 1935 and Article 254 of the   Constitution,   this   Court   analysed   the   Constitutions   of   other jurisdictions   on   the   question   of   inconsistency   of   laws   and summarized the propositions of law as follows: “51. The   case   law   referred   to   above,   therefore,   yields   the following propositions : 51.1.   Repugnancy   under   Article   254   arises   only   if   both   the Parliamentary   (or   existing   law)   and   the   State   law   are referable   to   List   III   in   the   Seventh   Schedule   to   the Constitution of India. 51.2.   In   order   to   determine   whether   the   Parliamentary   (or existing law) is referable to the Concurrent List and whether the   State   law   is   also   referable   to   the   Concurrent   List,   the doctrine   of   pith   and   substance   must   be   applied   in   order   to find   out   as   to   where   in   pith   and   substance   the   competing statutes   as   a   whole   fall.   It   is   only   if   both   fall,   as   a   whole, 5 (2018) 1 SCC 407 48 within   the   Concurrent   List,  that   repugnancy   can  be   applied to   determine   as   to   whether   one   particular   statute   or   part thereof has to give way to the other. 51.3.   The   question   is   what   is   the   subject­matter   of   the statutes in question and not as to which entry in List III the competing statutes are traceable, as the entries in List III are only   fields   of   legislation;   also,   the   language   of   Article   254 speaks of repugnancy not merely of a statute as a whole but also “any provision” thereof. 51.4. Since there is a presumption in favour of the validity of statutes   generally,   the   onus   of   showing   that   a   statute   is repugnant   to   another   has   to   be   on   the   party   attacking   its validity. It must not be forgotten that that every effort should be   made   to   reconcile   the   competing   statutes   and   construe them  both so as to avoid repugnancy­­care should be taken to see whether the two do not really operate in different fields qua different subject­matters. 51.5. Repugnancy must exist in fact and not depend upon a mere possibility. 51.6.   Repugnancy   may   be   direct   in   the   sense   that   there   is inconsistency   in   the   actual   terms   of   the   competing   statutes and there is, therefore, a direct conflict between two or more provisions   of   the   competing   statutes.   In   this   sense,   the inconsistency   must   be   clear   and   direct   and   be   of   such   a nature   as   to   bring   the   two   Acts   or   parts   thereof   into   direct collision   with   each   other,   reaching   a   situation   where   it   is impossible   to   obey   the   one   without   disobeying   the   other. This   happens   when   two   enactments   produce   different   legal results when applied to the same facts. 51.7.   Though   there   may   be   no   direct   conflict,   a   State   law may   be   inoperative   because   the   Parliamentary   law   is intended   to   be   a   complete,   exhaustive   or   exclusive   code.   In such   a   case,   the   State   law   is   inconsistent   and   repugnant, even   though   obedience   to   both   laws   is   possible,   because   so long as the State law is referable to the same subject­matter as   the   Parliamentary   law   to   any   extent,   it   must   give   way. One   test   of   seeing   whether   the   subject­matter   of   the Parliamentary law is encroached upon is to find out whether the   Parliamentary   statute   has   adopted   a   plan   or   scheme 49 which will be hindered and/or  obstructed by  giving  effect to the State law. It can then be said that the State law trenches upon   the   Parliamentary   statute.   Negatively   put,   where Parliamentary   legislation   does   not   purport   to   be   exhaustive or   unqualified,   but   itself   permits   or   recognises   other   laws restricting   or   qualifying   the   general   provisions   made   in   it, there can be said to be no repugnancy. 51.8. A conflict may arise when Parliamentary law and State law   seek   to   exercise   their   powers   over   the   same   subject­ matter.   This   need   not   be   in   the   form   of   a   direct   conflict, where  one says "do"  and the other  says  "don't".  Laws under this   head   are   repugnant   even   if   the   rule   of   conduct prescribed   by   both   laws   is   identical.   The   test   that   has   been applied in such cases is based on the principle on which the rule   of   implied   repeal   rests,   namely,   that   if   the   subject­ matter of the State legislation or part thereof is identical with that   of   the   Parliamentary   legislation,   so   that   they   cannot both stand together, then the State legislation will be said to be   repugnant   to   the   Parliamentary   legislation.   However,   if the   State   legislation   or   part   thereof   deals   not   with   the matters   which   formed   the   subject­matter   of   Parliamentary legislation   but   with   other   and   distinct   matters   though   of   a cognate and allied nature, there is no repugnancy. 51.9.   Repugnant   legislation   by   the   State   is   void   only   to   the extent of the repugnancy. In other words, only that portion of the   State’s   statute   which   is   found   to   be   repugnant   is   to   be declared void. 51.10.   The   only   exception   to   the   above   is   when   it   is   found that   a   State   legislation   is   repugnant   to   Parliamentary legislation   or   an   existing   law   if   the   case   falls   within   Article 254(2),   and   Presidential   assent   is   received   for   State legislation,   in   which   case   State   legislation   prevails   over Parliamentary legislation or an existing law within that State. Here   again,   the   State   law   must   give   way   to   any   subsequent Parliamentary   law   which  adds  to,  amends,  varies   or   repeals the law made by the Legislature of the State, by virtue of the operation of Article 254(2) proviso.” 50 8.2 In   Innoventive   Industries   Limited   (supra),   this   Court considered   almost   all   earlier   decisions   starting   from   Zaverbhai Amaidas   vs.   State   of   Bombay 6 ;   Tika   Ramji   vs.   State   of   U.P . 7 , Deep Chand vs. State of U.P   and so on and so forth. In sum and substance,   this   Court   held   that   repugnancy  under  Article   254 would arise only if both the Parliamentary law and the State law are referable to List­III . 8.3 Once it is clear that the RBI Act is traceable only to the Entries in List­I and the State enactments are traceable only to an Entry in List­II, the question of repugnancy under Article 254 does not arise, as has been held in  Innoventive Industries Limited.    But in cases of   this   nature,   Article   246(1)   would   squarely   apply.   Article   246(1) reads as follows:­ “246.   Subject­matter of laws made by Parliament and by the Legislatures of States:  ­  (1)     Notwithstanding   anything   in   clauses   (2)   and   (3), Parliament has exclusive power to make laws with respect to any   of   the   matters   enumerated   in   List   I   in   the   Seventh Schedule   (in   this   Constitution   referred   to   as   the   “Union List”).” 6 AIR 1954 SC 752 7   AIR 1956 SC 676 51 8.4 In   UCO   Bank   and   Another   vs.   Dipak   Debbarma   and Others 8 , a sale Notification issued under the Securitisation Act was challenged on the ground that it constituted an infraction of Tripura Land Revenue and Land Reforms Act, 1960. This Court found that the   Securitisation   Act   is   traceable   to   Entry­45   of   List­I   and   the Tripura Act is traceable to Entries 18 and 45 of the State List. After referring   to   the   Constitution   Bench   decision   in   State   of   West Bengal and Others vs. Committee   for Protection of Democratic Rights, West Bengal and Others 9   and other decisions, this Court held that the Securitisation Act, being a Parliamentary legislation is the dominant legislation. To come to the said conclusion, this Court referred to the  non­obstante  clause in Article 246(1).  8.5 Many times, this Court has invoked the doctrine of eclipse, in relation  to pre­constitutional  laws  with reference  to  Article 13(1) of the  Constitution.  But in  later  years, this  doctrine came to  be used even   in   different   contexts.   For   instance   in   Kailash   Sonkar   vs. Smt.   Maya   Devi 10 ,   this   Court   invoked   the   doctrine   of   eclipse   to 8 (2017)2 SCC 585 9 (2010) 3 SCC 571  10 (1984) 2 SCC 91 52 hold   that   when   a   person   is   converted   to   Christianity   or   other religion,  the  original  caste  remains  under   eclipse  and  that   as soon as during his life time he is reconverted to the original religion, the eclipse disappears and the caste automatically revives.  Is the argument of Conflict, a mirage? 9. It was argued on behalf of the State that without pointing out any area of conflict between the two enactments the NBFCs cannot invoke either Article 246 or Article 254. 9.1 But the above argument has no substance. Once it is admitted that   the   RBI   Act   is   traceable   to   an   entry   in   List­I,   Article   246(1) comes   into   play.   In   any   case,   there   are   also   areas   of   conflict.   The Kerala Act, for instance, empowers the debtor under Section 8(1) to deposit the money due to money lender, into a Civil Court. Section 8(2) empowers  the Civil Court to pass orders  recording  full  or  part satisfaction of the loan. 9.2 But   the   jurisdiction   of   the   Civil   Court   stands   ousted   by Section 34 of the Securitisation Act, 2002. By virtue of a notification bearing   No.   S.O.856(E)   dated   24 th   February,   2020,   issued   in exercise   of   the   powers   conferred   by   Section   2(1)(m)(iv),   the   Central 53 Government have specified such NBFCs as defined in Section 45­I(f) of   the   RBI   Act   having   assets   worth   rupees   one   hundred   crore   and above to  be entitled for  enforcement  of  security  interest in secured debts of Rupees fifty lakhs and above. This Notification was issued in supersession of the earlier notifications. Therefore, it is clear that certain   NBFCs   are   entitled   to   enforce   security   interest   without   the intervention of the Civil Courts and the remedy of the borrower lies only   before   the   Debt   Recovery   Tribunal.   This   is   one   major   area   of conflict, which can be readily pointed out.  9.3 We have taken the above example only as a sample, for testing the validity of the argument of the learned counsel for the State and we find that the question of conflict does not go to the rescue of the State. Overriding Effect 10.       Section   45­Q   which   we   have   extracted   elsewhere   confers overriding effect upon Chapter III­B, over other laws. Therefore, the States of Gujarat and Kerala cannot contend that the laws made by them are in addition to the provisions of Chapter III­B.   54 10.1     Though   it   was   contended   by   the   learned   counsel   appearing for   the   State   of   Gujarat   that   the   Gujarat   Act   exempts   NBFCs registered   under   the   RBI   Act   from   seeking   registration   under   the Gujarat Act, we do not think that the same would go to the rescue of   State   of   Gujarat.   Under   Section   5(2)   of   the   Gujarat   Act,   NBFCs registered   under   the   RBI   Act   are   deemed   to   have   been   registered under the Gujarat Act. Therefore, all other provisions of the Gujarat Act   are   sought   to   be   applied   to   NBFCs   operating   in   the   State   of Gujarat.   The   other   provisions   of   the   Gujarat   Act   include   the   (i) power   of   search   and   seizure;   (ii)   requirement   to   maintain   certain books   and   registers   and   to   furnish   statements;   and   (iii)   the mandate   not   to   dispose   of   any   article   taken   from   a   debtor   as   a pawn, pledge or security, before a period of two years from the date stipulated   for   final   payment,   etc.   The   Gujarat   Act   also   empowers the Civil Court under Section 30 to reopen certain transactions and to   limit   the   interest   recoverable.   Section   32   of   the   Gujarat   Act empowers   the   borrower   to   deposit   the   money   before   a   Civil   Court and the civil Court to assume jurisdiction of the adjudication of the dispute. 55 10.2   Interestingly,   Gujarat   Act,   2011   tacitly   recognizes   the regulation of NBFCs under the RBI Act.  Yet the State got the assent of only the Governor. Conclusion 11     In   view   of   the   above,   we   are   of   the   considered   opinion   that the   Kerala   Act   and   the   Gujarat   Act   will   have   no   application   to NBFCs   registered   under   the   RBI   Act   and   regulated   by   RBI. Therefore,   all   the   appeals   filed   by   NBFCs   against   the   judgment   of the Kerala High Court are allowed.  Likewise the appeals filed by the State of Gujarat against the judgment of the Gujarat high Court are dismissed.  11.1   As   a   consequence,   Transfer   Petition   (Crl.)   No.359   of   2015, shall   also   stand   allowed   and   the   First   Information   Report   filed against the officer of the NBFC for violation of the provisions of the Kerala Act shall stand quashed.  11.2   An   application   for   impleadment   has   been   filed   by   one Mr. Davidson Dharmaraj in Civil Appeal No.5238 of 2012, claiming that   he  has   lodged   a  criminal   complaint   against   the  appellant   and 56 its   officers   in   the   Civil   Appeal,   namely   M/s.   Muthoot   Finance Private   Limited,   for   alleged   offences   under   the   Indian   Penal   Code, but   relying   upon   the   provisions   of   the   Tamil   Nadu   Pawn   Brokers Act   and   the   rules   framed   there   under   and   that   any   decision rendered   in   the   appeals   arising   out   of   the   decisions   of   the   Kerala and   Gujarat   High   Courts   may   have   an   impact   on   his   criminal complaint.     Though   we   have   not   examined   the   provisions   of   the Tamil Nadu Pawn Brokers Act and the Tamil Nadu Money Lenders Act,   the  principles  of  law   laid  down   herein,   would   apply   equally   to these   State   enactments   also.   Therefore,   the   application   for impleadment namely I.A. No.2 of 2015 is dismissed. 11.3   There will be no order as to costs.   ………………………………….J. (Hemant Gupta) ………………………………….J. (V. Ramasubramanian) New Delhi May 10, 2022 57