# NEDUMPILLI FINANCE COMPANY LIMITED v. STATE OF KERALA & ORS

- **Citation:** [2022] 7 S.C.R. 1005
- **Court:** Supreme Court of India
- **Decided:** 2022-05-10
- **Case number:** Civil Appeal No. 5233 of 2012
- **Bench:** Hemant Gupta, V. Ramasubramanian
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/nedumpilli-finance-company-limited-v-state-of-kerala-ors-36167
- **Pages:** 43

## Headnote

Reserve Bank of India Act, 1934 (RBI Act) - Chapter III-B -
Kerala Money Lenders Act,1958 (Kerala Act) - Gujarat Money
Lenders Act, 2011 (Gujarat Act) - Applicability of States' Act on
Non-Banking Financial Companies - Whether Non-Banking
Financial Companies (NBFCs) regulated by the Reserve Bank of
India, in terms of the provisions of Chapter III-B of the RBI Act
could also be regulated by State enactments such as Kerala Act and
Gujarat Act - Held : By Act 23 of 1997, amendment made to Chapter
III-B, after which this Chapter has become a complete Code in so
far as NBFCs are concerned - The scheme of Chapter III-B of the
RBI Act shows that the power of intervention available for the RBI
over NBFCs, is from the cradle to the grave - Once it is found that
Chapter III-B of the RBI Act provides a supervisory role for the RBI
to oversee the functioning of NBFCs, from the time of their birth (by
way of registration) till the time of their commercial death (by way
of winding up), all activities of NBFCs automatically come under
the scanner of RBI - As a consequence, the single aspect of taking
care of the interest of the borrowers which is sought to be achieved
by the State enactments gets subsumed in the provisions of Chapter
III-B - The Kerala Act and the Gujarat Act will have no application
to NBFCs registered under the RBI Act and regulated by RBI.
Principles/Doctrines - Doctrine of Eclipse, conflict and
repugnancy - The moment the Parliament stepped in to codify the
law relating to registration and regulation of NBFCs, by inserting
certain provisions in Chapter III-B of the RBI Act, the same would
cast a shadow on the applicability of the provisions of the Kerala
Act to NBFCs registered under the RBI Act and regulated by RBI -
In case of Gujarat, State of Gujarat contended that the Gujarat Act
exempts NBFCs registered under the RBI Act from seeking
registration under the Gujarat Act - However, u/s. 5(2) of the
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Gujarat Act, NBFCs registered under the RBI Act are deemed to
have been registered under the Gujarat Act - Gujarat Act, 2011
tacitly recognizes the regulation of NBFCs under the RBI Act - Yet
the State got the assent of only the Governor - Therefore, Kerala
Act and the Gujarat Act will have no application to NBFCs registered
under the RBI Act and regulated by RBI - Reserve Bank of India
Act, 1934 (RBI Act) - Kerala Money Lenders Act,1958 (Kerala Act)
- Gujarat Money Lenders Act, 2011 (Gujarat Act).
Disposing of the appeals, the Court
HELD : Scheme of Kerala Act, Gujarat Act and RBI Act
1. In the background of the facts, the legal issue arising for
consideration has to be resolved by looking at the scheme of the
two State enactments, the scheme of RBI Act and the relevant
Entries in the appropriate List of the Seventh Schedule, to which
these enactments can be traced. [Para 4][1016-D-E]
2. The only object of the Kerala Money Lenders Act was
to afford protection to borrowers from unscrupulous money
lenders who advanced usurious loans. Though it was proclaimed
in the statement of objects, in general terms, that it was intended
to regulate the business of money lending, the Act was primarily
intended only to cover one aspect of the business of financing.
[Para 4.7][1017-E]
3. Section 2(7) of the Kerala Act, defines a "money lender".
In the definition, 7 different types of business entities are excluded
from the definition of the expression "money lending". A financial
corporation which is not a bank and which is otherwise known as
NBFC, is not listed as one of the entities excluded from the
definition of the expression "money lender". [Paras 4.8,
4.9][1017-F; 1018-G-H]
4. But the definition of "money lender" in the Kerala Act
excludes only a "bank" to which the Banking Regulation Act
applies. It does not exclude a non banking institution from the
definition. Therefore, the Kerala State authorities started claiming
and technically rightly so, that NBFCs are not excluded

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 [2022] 7 S.C.R. 1005
1005
NEDUMPILLI FINANCE COMPANY LIMITED
v.
STATE OF KERALA & ORS.
(Civil Appeal No. 5233 of 2012)
MAY 10, 2022
[HEMANT GUPTA AND V. RAMASUBRAMANIAN, JJ.]
Reserve Bank of India Act, 1934 (RBI Act) - Chapter III-B -
Kerala Money Lenders Act,1958 (Kerala Act) - Gujarat Money
Lenders Act, 2011 (Gujarat Act) - Applicability of States' Act on
Non-Banking Financial Companies - Whether Non-Banking
Financial Companies (NBFCs) regulated by the Reserve Bank of
India, in terms of the provisions of Chapter III-B of the RBI Act
could also be regulated by State enactments such as Kerala Act and
Gujarat Act - Held : By Act 23 of 1997, amendment made to Chapter
III-B, after which this Chapter has become a complete Code in so
far as NBFCs are concerned - The scheme of Chapter III-B of the
RBI Act shows that the power of intervention available for the RBI
over NBFCs, is from the cradle to the grave - Once it is found that
Chapter III-B of the RBI Act provides a supervisory role for the RBI
to oversee the functioning of NBFCs, from the time of their birth (by
way of registration) till the time of their commercial death (by way
of winding up), all activities of NBFCs automatically come under
the scanner of RBI - As a consequence, the single aspect of taking
care of the interest of the borrowers which is sought to be achieved
by the State enactments gets subsumed in the provisions of Chapter
III-B - The Kerala Act and the Gujarat Act will have no application
to NBFCs registered under the RBI Act and regulated by RBI.
Principles/Doctrines - Doctrine of Eclipse, conflict and
repugnancy - The moment the Parliament stepped in to codify the
law relating to registration and regulation of NBFCs, by inserting
certain provisions in Chapter III-B of the RBI Act, the same would
cast a shadow on the applicability of the provisions of the Kerala
Act to NBFCs registered under the RBI Act and regulated by RBI -
In case of Gujarat, State of Gujarat contended that the Gujarat Act
exempts NBFCs registered under the RBI Act from seeking
registration under the Gujarat Act - However, u/s. 5(2) of the
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Gujarat Act, NBFCs registered under the RBI Act are deemed to
have been registered under the Gujarat Act - Gujarat Act, 2011
tacitly recognizes the regulation of NBFCs under the RBI Act - Yet
the State got the assent of only the Governor - Therefore, Kerala
Act and the Gujarat Act will have no application to NBFCs registered
under the RBI Act and regulated by RBI - Reserve Bank of India
Act, 1934 (RBI Act) - Kerala Money Lenders Act,1958 (Kerala Act)
- Gujarat Money Lenders Act, 2011 (Gujarat Act).
Disposing of the appeals, the Court
HELD : Scheme of Kerala Act, Gujarat Act and RBI Act
1. In the background of the facts, the legal issue arising for
consideration has to be resolved by looking at the scheme of the
two State enactments, the scheme of RBI Act and the relevant
Entries in the appropriate List of the Seventh Schedule, to which
these enactments can be traced. [Para 4][1016-D-E]
2. The only object of the Kerala Money Lenders Act was
to afford protection to borrowers from unscrupulous money
lenders who advanced usurious loans. Though it was proclaimed
in the statement of objects, in general terms, that it was intended
to regulate the business of money lending, the Act was primarily
intended only to cover one aspect of the business of financing.
[Para 4.7][1017-E]
3. Section 2(7) of the Kerala Act, defines a "money lender".
In the definition, 7 different types of business entities are excluded
from the definition of the expression "money lending". A financial
corporation which is not a bank and which is otherwise known as
NBFC, is not listed as one of the entities excluded from the
definition of the expression "money lender". [Paras 4.8,
4.9][1017-F; 1018-G-H]
4. But the definition of "money lender" in the Kerala Act
excludes only a "bank" to which the Banking Regulation Act
applies. It does not exclude a non banking institution from the
definition. Therefore, the Kerala State authorities started claiming
and technically rightly so, that NBFCs are not excluded from the
definition of "money lender". Though the NBFCs claimed that
under clause (f) of sub-section (7) of Section 2, "any institution
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established by or under an Act of Parliament or the Legislature
of a State" are excluded from the definition of the expression
"money-lender" and that NBFCs are established under a
Parliamentary enactment, this argument was found by the State
to be based on a convoluted logic. The Court also thinks that the
State was right in thinking so, since NBFCs are not established
by or under an Act of Parliament or the legislature of a State.
Incorporation/registration of a business entity under an Act of
Parliament or the Legislature of a State, is completely different
from being established by or under an Act. For instance, all
companies are incorporated under the Companies Act. But a
corporation like the LIC of India, is established under the LIC
of India Act. Therefore, the appellants were not right in claiming
that they fall under the exclusion clause in clause (f) of sub-section
(7) of Section 2. [Para 4.15][1020-H; 1021-A-D]
5. By virtue of the definitions in the Gujarat Act, the
authorities under the Gujarat Act sought to apply the provisions
of the Act to NBFCs also. [Para 5.4][1024-B]
Role of RBI, the scheme of Chapter III-B of the RBI Act
and the Regulatory measures taken by RBI from time to time
6.In contrast to the state enactments regulating the
business of money lending, whose one-eyed focus is only the
protection of borrowers, the RBI Act takes a holistic approach
to the business of banking, money lending and operation of the
currency and credit system of the country. But when RBI Act
was enacted, the business of banking and finance was not as
complicated as it later turned out to be. [Para 6.2][1026-B]
7. In the early 1960s, the Government found it necessary
to regulate institutions which were not banks, but which were
carrying on other businesses allied to banking. Therefore, a bill
to amend the RBI Act, The Banking Companies Act, 1949, and
the State Bank of India (Subsidiary Banks) Act, 1959 was
introduced in November, 1963. [Para 6.3][1026-C]
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8. Accordingly, the Banking Laws (Miscellaneous
Provisions Act), 1963, was enacted, amending the provisions of
the aforesaid three Parliamentary enactments. It was by this
amendment which came into force on 01.02.1964 that Chapter
III-B was inserted in RBI Act. The Chapter heading for this
Chapter read as, "Provisions Relating to Non-Banking
Institutions Receiving Deposits and Financial Institutions".
However, this Chapter III-B was made inapplicable under Section
45H to a banking company as defined in Section 5 of the Banking
Companies Act, 1949. Section 45-I defined a 'financial institution'
under clause (c) to mean any non-banking institution which carries
on the business of financing or the business of acquisition of
shares, stocks etc., or the business of hire-purchase transactions.
[Para 6.4][1027-C-E]
9. All the above led to the promulgation of the Reserve
Bank of India (Amendment) Ordinance, 1997 on 09.01.1997.
Subsequently, a bill was introduced which became the Reserve
Bank of India (Amendment) Act, 1997. This Act completely
revamped Chapter III-B by amending the definition provision in
Section 45-I and inserting certain new provisions such as Section
45-IA, 45-IB, 45-IC, 45-JA, 45-MB, 45-MC etc. After the
amendment made to Chapter III-B by Act 23 of 1997, this Chapter
has become a complete Code in so far as NBFCs are concerned.
This can be seen from various provisions of Chapter III-B. [Para
6.10][1029-F-H]
10. The scheme of Chapter III-B of the RBI Act shows
that the power of intervention available for the RBI over NBFCs,
is from the cradle to the grave. In other words, no NBFC can
carry on business without being registered under the Act and a
NBFC which takes birth with the registration under the Act is
liable to be wound up at the instance of the RBI. The entire life
of a NBFC from the womb to the tomb is also regulated and
monitored by RBI. [Para 6.11][1031-F-G]
11. Once it is found that Chapter III-B of the RBI Act
provides a supervisory role for the RBI to oversee the functioning
of NBFCs, from the time of their birth (by way of registration) till
the time of their commercial death (by way of winding up), all
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activities of NBFCs automatically come under the scanner of RBI.
As a consequence, the single aspect of taking care of the interest
of the borrowers which is sought to be achieved by the State
enactments gets subsumed in the provisions of Chapter III-B.
[Para 6.19][1035-E-F]
12. Apart from the provisions of Chapter III-B, the
regulations, directions and Master Circulars issued by RBI from
time to time, also bind the NBFCs. Since the Regulations, Master
Circulars and Directions issued by RBI are binding on NBFCs,
it is clear from the above that all aspects of NBFCs are regulated
by RBI and nothing is left untouched. However, there are certain
categories of NBFCs, which may be exempt, by RBI itself, in
exercise of the power conferred by section 45-NC of the Act,
from the application of the provisions of RBI Act. [Para 6.20][1035G; 1038-E-F]
Is Chapter III-B a complete code?
13. To find out whether NBFCs registered under Chapter
III-B of the RBI Act and regulated by RBI could still be controlled
by the State enactments, because of the definition of the
expression "money lender", the Court first have to see whether
Chapter III-B of the RBI Act is a complete code or not. [Para
7][1039-C-D]
14. No NBFC can commence or carry on business without
obtaining the certificate of registration under the Act. Their
continuation in business would depend upon compliance with
certain prescriptions found in the RBI Act as well as the circulars/
directions issued by RBI. The RBI has the power to supersede
the Board of Directors of a NBFC and has power even to wind up
a NBFC. Thus the supervision and regulation of NBFCs, by the
RBI, is from the time of birth till the time of death. If a statutory
enactment which provides for such a type of control and
supervision is not a complete code in itself, the court does not
know what else could be a complete code. In Integrated Finance
Company Limited vs. Reserve Bank of India and Others, this Court
held in para 47 of the Report that "Chapter III-B of the RBI Act
is a complete code in itself". [Paras 7 and 7.1][1039-D-F]
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15. It may be true that many times RBI may not be
controlling the rate of interest charged by NBFCs on the loans
advanced by them. It does not mean that they have no power to
step in. The power to determine policy and issue directions,
available under Section 45-JA can always be invoked by RBI.[
Para 7.4][1040-C-D]
16. Section 45L(1)(b) confers power upon the RBI to give
directions to NBFCs "relating to the conduct of business by
them". Therefore, to say that RBI has no power in respect of
such an important aspect, may not be correct. The fact that RBI
generally leaves it to the market forces to determine the rate of
interest, without any direct intervention, is not something that
could be taken advantage of by the State of Kerala to step in and
prescribe the maximum rate of interest chargeable by NBFCs
on the loans advanced by them. [Para 7.8][1041-A-B]
17. In Deep Chand v. State of U.P., the Constitution Bench
of this Court reiterated three important tests of inconsistency or
repugnancy, namely, (i) whether there is direct conflict between
the two provisions; (ii) whether Parliament intended to lay down
an exhaustive Code in respect of the subject matter replacing
the Act of the State legislature; and (iii) whether the law made by
Parliament and the law made by State legislature occupy the same
field. Therefore, more than supporting the case of the State, Deep
Chand actually supports the case of the NBFCs, as we have found
that Chapter III-B is a complete code in itself. [Para 7.9][1041C-D]
Doctrine of Eclipse, conflict and repugnancy
18. As indicated by the Constitution Bench in Deep Chand
, a law may be valid when made, but a shadow may be cast on it by
supervening constitutional inconsistency or supervening existing
statutory inconsistency. Assuming that the Kerala Act was valid
in its application to NBFCs when it was made, on the ground that
the business of money lending is traceable to Entry 30 of List II,
it has to give way for the parliamentary enactment. The moment
the Parliament stepped in to codify the law relating to registration
and regulation of NBFCs, by inserting certain provisions in
Chapter III-B of the RBI Act, the same would cast a shadow on
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the applicability (even assuming it is applicable) of the provisions
of the Kerala Act to NBFCs registered under the RBI Act and
regulated by RBI. [Para 8][1041-E-F]
19. This Court held that repugnancy under Article 254 would
arise only if both the Parliamentary law and the State law are
referable to List-III. Once it is clear that the RBI Act is traceable
only to the Entries in List-I and the State enactments are traceable
only to an Entry in List-II, the question of repugnancy under
Article 254 does not arise, as has been held in Innoventive
Industries Limited. But in cases of this nature, Article 246(1)
would squarely apply. [Paras 8.2, 8.3][1044-B-D]
Is the argument of Conflict, a mirage?
20. It was argued on behalf of the State that without pointing
out any area of conflict between the two enactments the NBFCs
cannot invoke either Article 246 or Article 254. [Para 9][1045D]
21. But the above argument has no substance. Once it is
admitted that the RBI Act is traceable to an entry in List-I, Article
246(1) comes into play. In any case, there are also areas of conflict.
[Para 9.1][1045-D-E]
Overriding Effect
22. Section 45-Q which confers overriding effect upon
Chapter III-B, over other laws. Therefore, the States of Gujarat
and Kerala cannot contend that the laws made by them are in
addition to the provisions of Chapter III-B. [Para 10][1046-B]
23. Though it was contended by the learned counsel
appearing for the State of Gujarat that the Gujarat Act exempts
NBFCs registered under the RBI Act from seeking registration
under the Gujarat Act, the same would go to the rescue of State
of Gujarat. Under Section 5(2) of the Gujarat Act, NBFCs
registered under the RBI Act are deemed to have been
registered under the Gujarat Act. Therefore, all other provisions
of the Gujarat Act are sought to be applied to NBFCs operating
in the State of Gujarat. The other provisions of the Gujarat Act
include the (i) power of search and seizure; (ii) requirement to
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maintain certain books and registers and to furnish statements;
and (iii) the mandate not to dispose of any article taken from a
debtor as a pawn, pledge or security, before a period of two years
from the date stipulated for final payment, etc. The Gujarat Act
also empowers the Civil Court under Section 30 to reopen certain
transactions and to limit the interest recoverable. Section 32 of
the Gujarat Act empowers the borrower to deposit the money
before a Civil Court and the civil Court to assume jurisdiction of
the adjudication of the dispute. Interestingly, Gujarat Act, 2011
tacitly recognizes the regulation of NBFCs under the RBI Act.
Yet the State got the assent of only the Governor. [Paras 10.1,
10.2][1046-C-F]
24. The Kerala Act and the Gujarat Act will have no
application to NBFCs registered under the RBI Act and regulated
by RBI. Therefore, all the appeals filed by NBFCs against the
judgment of the Kerala High Court are allowed. Likewise the
appeals filed by the State of Gujarat against the judgment of the
Gujarat high Court are dismissed. [Para 11][1046-G]
Deep Chand vs. State of U.P. AIR 1959 SC 648 : [1959]
Suppl. SCR 8 - followed.
Internet and Mobile Association of India vs. Reserve
Bank of India (2020) 10 SCC 274 : [2020] 2 SCR 297;
Innoventive Industries Limited vs. ICICI Bank and Anr.
(2018) 1 SCC 407 : [2017] 8 SCR 33 - relied on.
Integrated Finance Company Limited vs. Reserve Bank
of India and Others (2015) 13 SCC 772 : [2013] 13
SCR 938; Zaverbhai Amaidas vs. State of Bombay AIR
1954 SC 752 : [1955] SCR 799; Tika Ramji vs. State of
U.P. AIR 1956 SC 676 : [1956] SCR 393; UCO Bank
and Another vs. Dipak Debbarma and Others (2017) 2
SCC 585 : [2016] 11 SCR 723; State of West Bengal
and Others vs. Committee for Protection of Democratic
Rights, West Bengal and Others (2010) 3 SCC 571 :
[2010] 2 SCR 979; Kailash Sonkar vs. Smt. Maya Devi
(1984) 2 SCC 91 : [1984] 2 SCR176 - referred to.
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Case Law Reference
[2020] 2 SCR 297
relied on
Para 6.1
[2013] 13 SCR 938
referred to
Para 7
[1959] Suppl. SCR 8
followed
Para 7.2
[2017] 8 SCR 33
relied on
Para 8.1
[1955] SCR 799
referred to
Para 8.2
[1956] SCR 393
referred to
Para 8.2
[2016] 11 SCR 723
referred to
Para 8.4
[2010] 2 SCR 979
referred to
Para 8.4
[1984] 2 SCR 176
referred to
Para 8.5
CIVIL APPELLATE JURISDICTION : Civil Appeal No.5233
of 2012.
From the Judgment and Order dated 18.11.2009 of the High Court
of Kerala at Ernakulam in W.A. No.1379 of 2008.
With
Civil Appeal Nos.5230, 5190, 5191, 5184, 5241, 5185, 5111, 5188,
5187, 5183 And 5113 of 2012, Civil Appeal @ Special Leave Petition
(Civil) No.8331 of 2015, Transfer Petition (Crl.) No.359 of 2015, Civil
Appeal Nos.5186, 5192, 5189, 5112, 5232, 5231, 5234, 5237, 5238 And
5315 of 2012, Civil Appeal Nos.18786-18787 Of 2017, Civil Appeal
No.1324 of 2015 And Civil Appeal No.7836 Of 2012
Jaideep Gupta, Guru Krishna Kumar, A. K. Singh, G. Umapathy,
Kodanda Ram, Rana Mukherjee, Sr. Advs., Nishe Rajen Shonker, Ms.
Anu K. Joy, Alim Anvar, Ms. Manicka Priya S., Riddhi Bose, Nikhil
Swami, Ms. Divya Swami, Ms. Prabha Swami, Tanmaya Agarwal, Wrick
Chatterjee, Sonal Kumar Singh, Anish Jaipuria, Gaurav Rai, Upendra
Mishra, Ashish Ranjan, Rajat Navet, Kushagra Pandit, Pradeep Kumar
Bakshi, A. Raghunath, Ms. Bina Madhavan, Tushar Gupta, M/s Lawyer
S. Knit & Co., Balaji Srinivasan, Prateek Yadav, Mohd. Shahrukh, Ms.
Archana Pathak Dave, Ms. Deepanwita Priyanka, Pratap Venugopal,
Ms. Surekha Raman, Deelip, Akhil Abraham Roy, Vijay Valsan for M/s
K. J. John and Co., Naresh Kaushik, Manoj Joshi, Vardhman Kaushik,
B. Purushottam Reddy, R. Anand Padmanabhan, A. Raghunath, Anuj
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Berry, Vibhore Yadav, S. S. Shroff, K. V. Mohan, K. V. Balakrishnan, P.
S. Prasanth, Vikas Mehta, Ms. Akanksha Vigyan, E. M. S. Anam, M. P.
Vinod, Atul Shankar Vinod, Dileep Pillai, Ajay Kumar Jain, T. L. V.
Ramachari, Hitesh Kumar Sharma, Akhileshwar Jha, T. N. Rama Rao,
E. Vinay Kumar, Naresh Kumar, Sanjeev Singh, Ms. Kajal Bhatia, Ms.
Sudhanshu Palo, Budha Dev Palo, Abhilas Kumar Tripathi, Ms. Padma
Chaudhary, B. Jagannath Rao, Ramesh Babu M. R., Ms. Manisha Singh,
Ms. Nisha Sharma, Ms. Jagriti Bharti, Ms. Mukti Chowdhary, Manoj,
Ms. Aparna Sinha, Ms. Oindrilla Sen, Manu Nair, Neelabh Shreesh,
Abhisth Kumar, Mrs. Lalita Kaushik, Jogy Scaria, C. K. Sasi, M. T.
George, Ms. Susy Abraham, Johns George, S. Gowthaman, Advs. for
the appearing parties.
The Judgment of the Court was delivered by
V. RAMASUBRAMANIAN, J.
1. The question as to whether Non-Banking Financial Companies
(for short "NBFCs") regulated by the Reserve Bank of India, in terms
of the provisions of Chapter III-B 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.
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
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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 non-banking 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 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 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.
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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 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 List-I 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".
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 List-II. 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 List-I.
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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 List-II 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.
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:-
"2. Definitions. xxx
xxx
xxx
(7) "money-lender" 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 co-operative society; or
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(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 money-lender in respect
of that business for the purposes of this Act.
Explanation II.- For the purposes of this Clause, clause (7A),
Proviso to sub-section (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".
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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);
(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:-
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"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:-
"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 45-H of the RBI Act
states that the provisions of Chapter III-B shall not 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,
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the Kerala State authorities started claiming and technically rightly so,
that NBFCs are not excluded from the definition of "moneylender".
Though the NBFCs claimed that under clause (f) of sub-section (7) of
Section 2, "any institution established by or under an Act of
Parliament or the Legislature of a State" are excluded from the
definition of the expression "money-lender" and that NBFCs are
established under a Parliamentary enactment, this argument was found
by the State to be based on a convoluted logic. 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 the Companies Act. But a corporation like the LIC
of India, is established under the LIC of India Act. Therefore, the
appellants were not right in claiming that they fall under the exclusion
clause in clause (f) of sub-section (7) of Section 2. 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;
(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;
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(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 pawn-broker 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".
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 co-operative society;
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(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;
(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 money-lending, 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 Export-Import Bank of India
established under the Export-Import 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
NEDUMPILLI FINANCE COMPANY LIMITED v. STATE OF
KERALA & ORS. [V.