# PEERLESS GENERAL FINANCE AND INVESTMENT CO. LTD. AND ANR v. RESER VE BANK OF INDIA

- **Citation:** [1992] 1 S.C.R. 406
- **Court:** Supreme Court of India
- **Decided:** 1992-01-30
- **Case number:** Civil Appeal Nos.400-403 of 1992
- **Bench:** N.M. Kasliwal, K. Ramaswamy
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/peerless-general-finance-and-investment-co-ltd-and-anr-v-reser-ve-bank-of-india-11408
- **Pages:** 60

## Headnote

Reserve Bank of India Act, I934:
Sections 45K (3), 45J, 451 & 45L: Residuary Non-Banking
Companies-Receiving deposits under the saving schemes-Directions issued by Jieserve Bank-,)uch companies to deposit with public sector
Banks or invest in unencumbered securities the aggregate amounts of
liabilities to depositors-To disdose the same as liabilities in order to
secure return of the "!Oney to depositors-,)uch directions whether statutory in natllre-Whether ultra vires of Section 45K (3)-Whether violative
of Artlt:les 14 and I 9 (I) (g) of the Constitution of India.
Constitution of India, I950:
Articles 14, I9 (I) (g), I9 (6): Directions issued by Reserve Bank of
India to Residuary Non-Banking Companies under Sections 45 J and 45 K
of the Reserve Bank of India Act, I934 safeguarding the interest of the
depositor-Vires of- Whether directions in the nature of reasonable re-
· strictions.
Articles I 3 (I) and (2): Constitutionality of a statute--Real effect of
the statute to be seen by lifting the veil of form and appearance of
legislation_:negree of encroachment on fondamental rights- Consideration of-Tests of fairness and reasonableness-Applicability
F
of-Constitutionality of the statute-Presumption of-Balance between
public interest and individual interest-Maintaining of
Practice & Procedure:
Function of Courts-Matters relating to financial and economic
G . policies--Bodies like Reserve Bank of India fully competent-Court not
to advise on such·matters.
While pronouncing its Judgment in Reserve Bank of India v.
Peerless General Finance and Investment Co. Ltd., [1987] 1 SCC 424,
this Court ·observed that it would be open to the Reserve Bank of
H
India (RBI) to take such steps as were open to it in law to regulate
406
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PEERLESS CO. v. R.B.I.
407
the savings schemes run by Residuary Non-Banking Companies (RNBCs)
A
to prevent exploitation of ignorant investors while at the same time
taking care to protect the thousands of employees working in such
companies. This Court also expressed grave concern at the mushroom growth of financial ·investment companies offering staggering
rates of interests to· depositors leading to suspicion whether these
companies were speculative ventures floated to attract unwary and · B
credulous investors and capture their hard-earned savings.
Pursuant to the said observations of this Court and keeping in
mind the public interest, the RBI in exercise of its powers under
sections 45J and 45K of the Reserve Bank of India Act, 1934, and of
all powers enabling it in that behalf, issued certain directions by C
way of Notification No. DFC-55/DG (0)'87 dated 15.5.1987.
A Writ Petition was filed before the High Court challenging
the constitutional validity of the said directions issued by the RBI. A
Single Judge of the High Court palsed certain interim orders. Being
aggrieved against the interim orders, the RBI preferred an appeal
before the Division Bench. The Division Bench disposed of the ap-·
peal as well as the Writ Petition. It held that the RBI was empowered to issue directions to the Residuary Non-Banking Companies in
the interest of depositors; but to the extent such direct.ions were
found to be prohibitory or unworkable and as such unreasonable,
would be beyond the powers of RBI.
Peerless which became a party-respondent, filed an application for clarification of the judgment, as regards payment against
discontinued certificates. The High Court clarified that in such cases
the depositors be allowed to take loan against payments made till
discontiunance 'On such terms and conditions as the company may
stipulate.
The present appeals were filed by RBI against the orders of
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the High Court. A Writ Petition has been filed directly before this
Court, challenging the directions as being ultra vires of sections 45J G
and 45K of the.Reserve Bank of India Act, 1934 as also violative of
the provisions of the constitution.
On behalf of the Writ Petitioners it was contended that since
the 1987 direc

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PEERLESS GENERAL FINANCE AND INVESTMENT
CO. LTD. AND ANR ..
v.
RESER VE BANK OF INDIA
JANUARY 30, 1992
[N.M. KASLIWAL AND K. RAMASWAMY, JJ.]
Reserve Bank of India Act, I934:
Sections 45K (3), 45J, 451 & 45L: Residuary Non-Banking
Companies-Receiving deposits under the saving schemes-Directions issued by Jieserve Bank-,)uch companies to deposit with public sector
Banks or invest in unencumbered securities the aggregate amounts of
liabilities to depositors-To disdose the same as liabilities in order to
secure return of the "!Oney to depositors-,)uch directions whether statutory in natllre-Whether ultra vires of Section 45K (3)-Whether violative
of Artlt:les 14 and I 9 (I) (g) of the Constitution of India.
Constitution of India, I950:
Articles 14, I9 (I) (g), I9 (6): Directions issued by Reserve Bank of
India to Residuary Non-Banking Companies under Sections 45 J and 45 K
of the Reserve Bank of India Act, I934 safeguarding the interest of the
depositor-Vires of- Whether directions in the nature of reasonable re-
· strictions.
Articles I 3 (I) and (2): Constitutionality of a statute--Real effect of
the statute to be seen by lifting the veil of form and appearance of
legislation_:negree of encroachment on fondamental rights- Consideration of-Tests of fairness and reasonableness-Applicability
F
of-Constitutionality of the statute-Presumption of-Balance between
public interest and individual interest-Maintaining of
Practice & Procedure:
Function of Courts-Matters relating to financial and economic
G . policies--Bodies like Reserve Bank of India fully competent-Court not
to advise on such·matters.
While pronouncing its Judgment in Reserve Bank of India v.
Peerless General Finance and Investment Co. Ltd., [1987] 1 SCC 424,
this Court ·observed that it would be open to the Reserve Bank of
H
India (RBI) to take such steps as were open to it in law to regulate
406
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4
PEERLESS CO. v. R.B.I.
407
the savings schemes run by Residuary Non-Banking Companies (RNBCs)
A
to prevent exploitation of ignorant investors while at the same time
taking care to protect the thousands of employees working in such
companies. This Court also expressed grave concern at the mushroom growth of financial ·investment companies offering staggering
rates of interests to· depositors leading to suspicion whether these
companies were speculative ventures floated to attract unwary and · B
credulous investors and capture their hard-earned savings.
Pursuant to the said observations of this Court and keeping in
mind the public interest, the RBI in exercise of its powers under
sections 45J and 45K of the Reserve Bank of India Act, 1934, and of
all powers enabling it in that behalf, issued certain directions by C
way of Notification No. DFC-55/DG (0)'87 dated 15.5.1987.
A Writ Petition was filed before the High Court challenging
the constitutional validity of the said directions issued by the RBI. A
Single Judge of the High Court palsed certain interim orders. Being
aggrieved against the interim orders, the RBI preferred an appeal
before the Division Bench. The Division Bench disposed of the ap-·
peal as well as the Writ Petition. It held that the RBI was empowered to issue directions to the Residuary Non-Banking Companies in
the interest of depositors; but to the extent such direct.ions were
found to be prohibitory or unworkable and as such unreasonable,
would be beyond the powers of RBI.
Peerless which became a party-respondent, filed an application for clarification of the judgment, as regards payment against
discontinued certificates. The High Court clarified that in such cases
the depositors be allowed to take loan against payments made till
discontiunance 'On such terms and conditions as the company may
stipulate.
The present appeals were filed by RBI against the orders of
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the High Court. A Writ Petition has been filed directly before this
Court, challenging the directions as being ultra vires of sections 45J G
and 45K of the.Reserve Bank of India Act, 1934 as also violative of
the provisions of the constitution.
On behalf of the Writ Petitioners it was contended that since
the 1987 directions issued by RBI were in the nature of subordinate
legislation, it was clear that RBI overstepped the bounds of the
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408
SUPREME COURT REPORTS
[1992] I S.C.R.
A . parent statute; that the source of power for issuing the directions as
being derived from section 45L was only an after-thought; that from
· the working results it appeared impossible to carry on the traditional business for any longer period without incurring huge losses;
that from in the business carried on by Peerless and other similar
RNBCs that the working capital is generated out of the subscripB
tions received from the certificate holders either in lump sum or in
instalments and such deposits are paid back with the guarante~d
accretions, bonus, interest etc. in terms of the contract at the ~nd of
the stipulated term; that the interest of the depositors has not been
impaired in any manner. whatsoever by the method of accountancy
followed by Peerless and all similar companies, namely, appropriaC tion of a part of the subscription to the profit and loss account and
meeting the working capital requirements out of the same.
On behalf of the appellant-RBI, it was contended that it had
the power to issue the sai(I directions; that the said directions were
issued in pursuance to this Court's observations, and in public inD
terest; that the said directions had not imposed any restriction on
the right to carry on business but only placed a restriction with
respect to one of the modes of raising reserves i.e. through public
deposits; that the directions cannot be condemned as being violative
of Article 19(1) (g); and that the formula laid down by the High
Court was self-defeating and deprived altogether the benefits of
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security provisions given to depositors under the 1987 directions.
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On behalf of the Peerless Field Officers Association, it was
contended that if the directions of 1987 were to be upheld, the undertakings of Peerless would face inevitable closure and almost 14
lac field officers would lose their only source of livelihood.
Allowing the appeals filed by RBI and dismissing the Writ
Petition filed by the Finance Companies, this Court,
HELD: Per Kasliwal, J
1.1 The Reserve Bank was competent and authorised to issue
G ·the impugned directions of 1987, in· exercise of powers conferred
under Section 45K(3) of the Act. [431 CJ
1.2 A combined reading of Section 45J, 45K and 45L of the
Reserve Bank of India Act, 1934 unmistakably goes to show that the
Reserve Bank if it cousiders necessary in the public interest so to
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do, can specify the conditions subject to which any prospectus or
advertisement soliciting deposits of money from the public may be
_._ . --
PEERLESS CO. v. R.B.I.
409
issued. It can also give directions to non-banking institutions in
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respect of any matters relating to or connected with the receipt of
deposits, including the rates of interest payable on such deposits,
and the periods for which deposits may be received. This latter
power flows from sub-section (3) of Section 45K of the Act. The
Bank under thi.s provision can give directions in respect of any matters relating to or connected with the receipt of deposits. Thus a very B
wide power isi given to the RBI to issue directions in respect of any
matters ralating to or connected with tbe receipt of deposits. It
cannot be considered as a power restricted or limited to receipt of
deposits onlf. Soch an interpretation would be violating the language of section 45K (3) which furnishes a wide power to the Reserve Bank to give any directions in respect of any matters relating C
to or connected with the receipt of deposits. The Reserve Bank
under this provision is entitled to give directions with regard to the
manner in which the deposits are to be invested and also the manner in which such deposjts are to be disclosed in the balance-sheet
or books of accounts of the company. The word 'any' qualifying
matters relating to or connected with the receipt of deposits in the
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above provision is of great significance and directions of 1987 are
fully covered under Section 45K (3) of the Act, which gives power to
the Reserve Bank to issue such directions. [430 D-H; 431 A]
1.3 When an authority lakes action which is within its competence, it cannot be said to be invalid merely because it purports to
be made under a wrong provision, if it can be shown to be within its
power under any other provision. [431 BJ
lmlian Aluminium Company etc. v. Kera/a State Electric.ity Hoard,
[1976] 1 SCR 70, relied on ..
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2.1 The function of the Court is to see that lawful authority is
not abused but not to attain itself'thc task entrusted to that authority. It is well settled that a public body invested with statutory
powers must take care not to exceed or abuse its power. It must
keep within the limits of the authority committed to it. H must act
in good faith and it must act reasonably. Courts are not to interfere
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with economic policy which is the function of experts. It is not the
function of the Courts to sit in Judgment over matters of economic
policy and it must necessarily be left to the expert bodies. The function of the Court is not to advise in matters re.lating to financial and
economic policies for which bodies like Reserve Bank arc fully competent. It would be hazardous and risky for the Courts to tread an
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SUPREME COURT REPORTS
[1992) I S.C.R.
, A
unknown path and should leave such task to the expert bodies.
[442 C..D]
2.2 Reserve Bank of India which is bankers' bank is a crea- .
lure of Statue. It has large contingent of expert advice relating to
matters affecting the economy of the entire country and nobody can
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doubt the bonafides of the Reserve Bank in issuing the impugned
directions of 1987. The Reserve Bank plays an important role in the
economy and financial affairs of India and one of its important
functions is to regulate the banking system in the country. It is the
duty of the Reserve Bank .to safeguard the economy and financial
stability of the country. In fact the directions of 1987 were issued by
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RBI after mature consideration with the help and advice of experts.
[441 B-D, 443 D-E]
Delhi Cloth and General Mills etc. v. Union of India etc., [1983]
3 SCR 438; Mis Prag Ice & Oil Mills and Anr. v. Union of India,
[1978] 3 SCC 459; Shi-i Sitaram Sugar Company Limited and Anr. v.
D
Union of India & Ors .. [1990] 3 SCC
0
223; RX Garg v. Union of India
& Ors. etc. etc., [1981) 4 SCC 675, relied on.
3. The Reserve Bank was right in taking the stand tha't if the
companies want to do their business, they should invest their own
working capital and find such resources elsewhere with which the
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Reserve Bank has no concern. [445-C]
4. It is not the concern of this Court to find out as to whether
actuaial method of accounting or any other method would be feasible or possible for the companies to adopt while carrying out the
conditions contained in paragraphs 6 and 12 of the directions of
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1987. The companies are free to adopt any mode of accounting
permissible under the law but it is certain that they will have to
follow the entire terms and conditions contained in the directions of
1987 including those contained in paragraphs 6 and 12. [445 E-F]
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5.1 It is not possible for the Court to determine as to how
much percentage of deposit of first instalment should be allowed
towards expenses which may consist of commission to agents, office
expem;es etc. It would depend fro.m company to company based on
various factors such as paid-up capital, percentage of commission
paid to the agents, rate of interest paid to the depositors, period of
maturity for repayment, office expenses and various other factors
necessary to mop up working capital out of the depositors money_.
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PEERLESS CO. v. R.B.I.
411
One cannot ignore the possibility of persons having no stake .of their
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own starting such business and after collecting huge deposits from
the investors belonging to the .poor and weaker sections of the society residing in rural areas, and to stop such business after a few
years thus devouring the hard earned money of the small investors.
In such kind of business, the agents always take interest in finding
new depositors because th.ey get a high rate of commission out of the B
first instalment, but they do not have same enthusiasm in respect of
deposit of subsequent instalments. In these circumstances if the Reserve Bank bas issued the directions of 1987 to safeguard the larger
interest of the public and small depositors it cannot be said that the
directions are •so unreasonable as to be declared constitutionally
invalid. [447 E-H, 448-A]
C
S.2 It cannot he said that the directions of 1987 amount to
prohibition of the business in a commercial sense and without reasonable basis. Nor are the directions violative of Article 19(1) (g) or'
the Constitution of India. [442 G-H, 443 A-BJ
· Mohammad Yasin v. The Town Area Committee, Jalalabad and
Anr., [1952) SCR 572; Premier Automobiles Ltd. and Anr v. Union of
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~ _.1,_
India, AIR .1972 SC 1690; Shree Meenakshi Mills ltd.· v. Union of
India, AIR 1974 SC 366, referred to.
6.
So far as Peerless is concerned there is no possibility of its
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closing down such business. It has already large accumulated funds
collected by making profits in the past several years. Thus it has·
enough working capital in order to meet"the expenses. It cannot be
said that after some years Peerless will have to close down its business if the directions contained in paragraphs 6 and 12 are to be
followed. The working capital is not needed every year as it can be
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rotated after having invested once. If the entire amount of the subscriptions is deposited or invested in the proportion of 10% in public sector banks, 70% in approved securities and 20% in other investments, such amounts will. also start earning interest. which can
be added and adjusted while depositing or investing the subsequent
years' deposits of the subscribers. In any case it lies with the new
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entrepreneurs while entering such field of business to make arrangement
of their own resources for working capital and for meeting the expenses and they cannot insist in utilising the money of the depositors for this purpose. So far as the companies already in this field
they must have earned profits id the past years which can be utilised as their working capital. It is important to note that the direcH
412
SUPREME COURT REPORTS
[1992] 1 S.C.R.
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A tions of 1987 have been made applicable from 15th May, 1987 prospectively and not retrospectively. (447 H; 448 C-F)
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7. The directions of 1987 as well as any other directions issued from time to time by the Reserve Ban~ relating to economic or
financial policy are ne~r so sacrosanct t&at the same cannot be
B changed. Even the financial budget for every year depends on the
economic and financial policy of the Government existing at the
relevant time. So far as the impugned directions are concerned if it
is found in future that the same are not workable or working against
I
the public interest, the Reserve Bank is always free to change its
•
policy and scrap or amend the directions as a11d when necessary. If
-.,_
c at any time, the Reserve Bank feels that.the business of the kind run
at present by the Peerless and other companies in terms of the
directions of 1987 are not yielding the result as envisaged by the
Reserve Bank, it will always be prepared to consider any new proposals which may be conductive both in the interes_t of the large
multitude of the investors as well as the employees of such coinpaD nies. !448 G-H, 449 A-BJ
Per Ramaswamy, J. (Concurring) :
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,_ -
t .. The directions of 1987 issued by RBI are within the powe·r
of the RBI to provide tardy, stable, identifiable and monitorable
E
method of operations by each RNBC and its, compliance of the directions. This will ensure security to the depositors at all times and
also make the accounts of the company accur.ate, ~ccountable and
easy to monitor the working system of the company itself and continuance of its tvorkmen. The directions in paragraptis 6 and.l2 are
F
just, fair and reasonable not only to the depositors, but in the long
run to the very existence of the company and its continued business
itself. Therefore, they are legal, valid and.constitutionally permissi-
,..A.
hie. [464 G-H, 465-AJ
2. Section 45K of'(he Reserve Bank of India Act empowers
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the RBI to collect information from non-banking institutions as to
deposit and to give directions that every non-banking institution
shall .furnish to the Bank, in such form, at such intervals and within
such time, such statements, information or particulars relating to or·
connected with deposits received by the n'on-banking institution, as
may be specified _by RBI by general or special order including the
H
rates of interest aild other terms and conditions on which they arc
received. Under. sub-se~tion (3) thereof the RBI is entitled to issue
J.o.
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PEERLESS CO. v. R.B.I.
413
in the public interest directions to non-banking institutions in respect of any matter relating to or connected with the receipt of
deposits including the rates of interest payable on such deposits and
the periods for which deposits may be received. The use of the
adjective 'any' matter relating to or connected with the receipt of
deposits is wide and comprehensive to empower the RBI to issue
directions in connection therewith or relating to the. receipt of deposits. But exercise ofthe power is hedged with and should be 'in
the public iuterest'. [450 C-F]
3.1 The State can regulate the exercise of the fundamental
right to save the public from a substantive evil. The existence of the
evil as well as the means adopted to check it are the tnatters for the
legislative judgment. But the court i~ entitled to consider whether
the degree and mode of the regulation is in excess of the requirement or is imposed in an arbitrary manner. The Court has to see
whether the measure adopted is relevant or appr1tp.riate to the power
exercised by the authority or whether it over stepped the limits of
social legislation. Smaller inroads may lead to larger inroads and
ultimately result in total prohibition by indirect method. If it directly transgresses or substantially and inevitably affects the f11ndamental right, it becomes unconstitutional, but not where the impact
is only remotely possible or incidental. The Court must lift the veil
of the form and appearance to discover the true character and the
nature of the legislation, and every endeavour should be made to
have the efficacy of fundamental right maintained and the legislature is not invested with unbounded power. The Court has, therefore, always to guard against the gradual encroachments and strike
down a restriction as soon as it reaches that magnitude of total
annihilation of the right. [453 F-H, 454 A]
3.2 In the interest of the general public, the law may impose
restrictions on the freedom of the citizen to start or carry on his
business. Whether an impugned provision imposing a fetter on the
exercise of the fundamental right guaranteed by Article 19(1) (g)
amounts to a reasonable restriction imposed in the interest of general public, must be adjudged not in the background of any theoretical standard or pre-determinate patterns, but in the light of the
nature and the incidence of the right, the interest of the general
public sought to be secured by imposin£ restrictions and the reasonableness of the quality and the extent .of the fetters imposed by
the .directions. The credit worthiness of RNBCs undoubtedly would
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SUPREME COURT REPORTS
[1992] 1 S.C.R.
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he sensitive. It thrives upon the confidence of the public, on the
honesty of its management and its reputation of solvency. The directions intended to promote 'freedom' and facility which are required to be regulated in the interest of all concerned. (457 E-F]
Hatisingh Mfg. Co. Ltd. & Anr. v. Union of India & Ors., (1960)
B
3 SCR 528; Latafat Ali Khan & Ors. v. State q( U.P., (1971) Supp.
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SCR 719, relied on.
4. There is presumption of constitutionality of every statute
and its validity is not to be determined by artificial standards. The
court has to examine with some strictness the substance of the legislation to find what actually and really the legislature has done. The
court would not he over persuaded by the mere presence of the
legislation. In adjudging the reasonableness of the law, the court
will necessarily ask the question whether the measure or scheme is
just, fair, reasonable and appropriate or unreasonable, unnecessary and arbitrarily interferes with the exercise of the right guaranteed in Part III of the Constitution. The Court has to maintain a
delicate balance between the public interest envisaged in the challenged provision and the individual's right taking into account the
nature of his right said to be infringed, the underlying purpose of
the restriction, the extent and urgency of the evil sought to be rem:
edied thereby, the disproportion of the restriction imposed, the
prevailing condition at the time, the surrounding circumstances, the
larger public interest which the law seeks to achieve and all other
relevant factors germane for the purpose. All these factors should
ente1r into the zone of consideration to find the reasonableness of the
impugned restriction. The Court weighs in each case which of the
two conflicting public or private interest demands greater protection and if it finds that the restriction imposed is appropriate, fair
and reasonable, it would uphold the restriction. The court would
not uphold a restriction which is not germane to achieve the purpose of the statute or is arbitrary or out of its limits. [454 B-C, E-G]
S. The directions are incorporated and became part of the
Act itself. They must be governed by the same principles as the
statute itself. The statutory presumption that the legislature inserted
every part thereof for a purpose and the legislative intention should
be given affect to, would be applicable to the directions of 1987 as
well. 1~45-E)
6.1 The RBI issued the directions to regulate the operations
PEERLESS CO. v. R.B.I.
415
of the RNBCs, to safeguard the interest of the depositors. Pay~ A
ment of interest, bonus, premium or other advantage, in whatever
name it may be called is reward for waiting or parting with liP,cidlty. It is paid because of positive time preference (one rupee
today is preferred to one rupee tomorrow) on the part of the
depositor. Therefore, the directions avowed to preserve the right
of the depositors to receive back the amount deposited with the
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contracted rate of interest; it aims to prevent depletion of the
deposits collected from the weaker segments of the society and
also tends to affect free now of the business of the RNBCs who
would desire to operate in their own way. [455 F-H]
6.2· Mushroom growth of non-banking agencies put afloat diC
verse schemes with alluring offers of staggering high rate of interest and other catchy advantages which would generate suspicion
of the bona fidcs of the offer. But gullible depositors arc lured to
make deposits. It is not uncommon that after collecting fabulous
deposits, some unscrupulous people surreptiously close the company. and decamp with the collections keeping the depositors at D
bay. Therefore, the need to regulate the deposits/subscriptions, in
particular in private sector became imperative to prevent exploitation or mismanagement as a social justice strategem. [457 A-BJ
6.3 RBI occupies place of 'pre-eQ\,inence' to ensure monetary
discipline and to regulate the economy or the credit system of the
country as an cxp·ert body. It also advises the Government in public finance and monetary regulations. The banks or non-banking
institutions shall have to regulate their operations in accordance
with not only as per the provisions of the Act but also the rules
and directions or instructions issued by the RBI in exercise of the
power thereunder. Chapter 3B tif the Reserve Bank of India Act
expressly deals with regulations of deposit and finance received
by the RNBCs. The directions, therefore, arc statutory regulations. [455 B-D]
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Joseph Kunivilla Vellukunne! v. Reserve Bank of India & Ors..
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[1962] Suppl. 3 SCR 632; State~( UP. v. Jlabu Ram. [1961] 2 SCR
679; D. V.K. Prasada Rao v. Govt. of A.P., AIR 1984 A.P. 75, relied
on.
7. The objects of the direction are to preserve the ability of
the _RNBC to pay back to the subscribers/depositors at any given
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SUPREME COURT REPORTS
fl 992] I S.C.R.
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time; safety of the subscribers' money and his right to unencumbered
repayment are thus of parall}ount public interest and the directions aimed to protect them. The directions cannot and would not
be adjudged to be ultra vires or arbitrary by reason of successful
financial management of an individual company. An overall view
of the working system of the scheme is re!evant and germane.
B
[460 C-D]
8. The obligation in paragraph 12 of periodical disclosure in
the accounts of a company of the deposits together with the interest
secured thereon, whether or not payable, but admittedly due as a
liability, is to monitor the discipline of the op~ration of the schemes
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and any infraction, would be dealt with as per law. The certificate
by a qualified Chartered Accountant is to vouchsafe the correctness
and authenticity of accounts and would and should adhere to the
statutory compliance. [460 D-E]
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9. The settled accounting practice is that a loan or deposit
received from a creditor has to be shown as a liability together with
accrued interest whether due or deferred. The actuarial accounting
applies to revenues and costs to which the concept of the 'going
concern' can be adopted. Therefore, in providing the costs of the
company it can set apart its costs on the basis that liability is created for interest, bonus etc. payable in foreseeable future. Undoubtedly the actuarial principle applied by the LIC or the gratuity schemes
are linked with life of the assured or the premature death before
retireinent of an employee, but RNBC in its contract does not undertake any such risk. The deposit or loan is a capital receipt but
not a revenue receipt and its full val'ue shall be shown in the account books or balance-sheet as liability of the company. It cannot
be credited to the profit and. loss account. Part II of Schedule I of
the co'mpanies Act, 1956 ·requires that the amoont shown in the
profit and loss account should be confined to the income and expenditure of the company. Para 12 of the di'rections is, thus, in
consonance with the Companies Act. Paragraph 6 only elongates the
contract in the public interest ,to safeguard the interest of the vulnerable sections of the depositors. The RBI cannot be expected to ·
constantly monitor the working of the RNBC in its day-to-day function. The actuarial basis cannot he adopted by the RNBCs. and the
liability must always be reflected in its balance-sheet at its full value.
Compliance of the direction in para 12, dehors any method of accountancy adopted by a company, intended to discipline its operations. [460 E-H, 461 A-CJ
)
.> .
' ......
PEERLESS CO. v. R.B.I.
417
10. Regulation includes total pro_hibition in a given case where
the. mischief to be remedied warrants total prohibition. The directions of 1987 are peither palpably arbitrary nor unjust nor unfair .
. The mechanism evolved in the directions is fool-proof, to secure the
interest of the depositors, as well is capable of monitoring the business management of every RNBC. It also protects the interest of the
·employees/field sfaff/commission agents etc. on permanent basis overcoming initial convulsion. It was included, in the best possible man-
'
ner, to subserve the interest llf all wilhout putting any prohibition
in the ability of a company to raise the deposit, even in the absence
of any adequate paid up capital or reserve fund or such pre-commitment of the owner, to secure such deposits. [4.62 E-G]
Narendra Kumar v. Union of India, (1960) 2 SCR 375, relied on.
Rese1ve Bank of India etc. v, Peerless General Finance and In-
'
vestment Qi. Ltd. & Ors. etc., [1987] 2 SCR 1, referred to.
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11. So long as the power is traceable l~Ahe statute, mere omisD
sion to recite the provision does not denude the power of the legislature or rule making authority to make the regulations, nor considered without authority of law. The asbsence of reiteration of objec-
··tive satisfaction in the preamble as of one under Section 45L does
not denude the powers; the RBI admittedly has the power under
Section 45L, to justify the actions. Though Section 45L was neither
E
expressly stated nor mentioned in the Preamble of the directions of
the required recitation or satisfaction of objective facts to issue the
directions, from the facts and circumstances it is demonstrated that
the RBI, had such satisfaction in its consideration the power under
Section 45L, when the directions were issued. Even otherwise Section 45K (3) itself is sufficient .to uphold the directions. (464 F-H]
F
12. The court has to see whether the. scheme, measure or regulation adopted is relevant or appropriate to the power exercised by
the authority. Prejudice to the interest of depositors is a relevant
factor. Mismanagement or inability to pay the accrued liabilities
are evils sought to be remedied. The direstions of 1987 designed to
G
· preserve the right of the depositors and t)le ability of RNBC to pay
back the contractual liability. It also intended to prevent mismanagement of the deposits collected from vulnerable social segments
who have no knowledge of banking operations or credit system and
repose unfounded bHnd faith on the company with fond hope of its
ability to pay back the contracted amount. Thus the directions maintain
H
418
SUPREME COURT REPORTS
[1992] I S.C.R.
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the thrift for saving and streamline and strengthen the monetary
.,.__
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operations of RNBCs. [463 E-G]
ORIGINAL JURISDICTION: Writ Petition (Civil) No. 677of1991.
(Under Article 32 of the Constitution of India)
WITH
Civil Appeal Nos.400-403 of 1992.
Shanti Bhushan, Somnath Chatterjee, Biswarup Gupta, Bhaskar Gupta,
G.L. Sanghi, Arun Jaitley, Dr. Debi Pal, Anil Diwan A.K. Sen, Harish N.
Salve, H.S. Parihar, Kuldip S. Parihar, Gopal Subramanium, Abhijit
Chatterjee, B. Lahiri, J.B. Dadachanji, S. Suku.maran, R.F. Nariman, G.S.
Chatterjee, Ms. Sumita Chatterjee, Ms. Mridula Ray, Arun Madan, Ms.
Priya Hingorani, Ms. Radha Rangaswamy, C.N. Sreek41llar, Rathin Das,
Ranjit Ghose, Sushi! Kumar Jain, Sudhanshu Atreya and Dr. A.M. Singhvi
for the appearing parties.
The Judgment of the Court was delivered by
KASLIWAL, J. Special Leave granted in all the petitions.
This litigation is an upshot of the earlier case Reserve Bank of India
v. Peerless General Finance and Investment Company Ltd. and Others,
[1987) 1 S.C.C. 424 decided on January 22,1987. In 1978 the Prize Chits
and Money Circulation Scheme (Banning) Act, 1978 (in short 'the Banning Act, was enacted 'to ban the promotion or conduct of prize chits or
money circulation schemes and for matters connected therewith or incidental 'hereto.' The question which arose in the above case was whether
the Endowment Scheme piloted by the Peerless General Finance and Investment Company Ltd.; (hereinafter in short 'the Peerless') fell within
the definition of 'Prize Chits' within' the meaning of Sec. 2 (e) of the
above Banning Act. By a letter dated July 23, 1979, the Reserve Bank of
India pointed out to the Peerless that the schemes conducted by it were
covered by the provisions of the Banning Act which had come into force
w.e. f. December 12, 1978. On September 3, 1979 the Peerless filed a WJ'it
petition in the Calcutta High Court for a declaration that the Prize Chits
Banning Act did not apply to the business carried on by the Peerless. A
s.miI:u .writ petition was filed questioning a notice issued by the Madbya
Pradesh Government on the same lines as that issued by the West Bengal
PEERLESS CO. v. R.B.l.[KASLIW AL, J.]
419
Government. A learned Single Judge of the l:jigh Court dismissed both
A
the writ petitions but appeals preferred by the Peerless under the Letters
Patent were allowed by a Division Bench of the Calcutta High Court.
It was declared that the business carried on by the Peerless did not
come within the mischief of the Prize Chits Banning Act. Against the
judgment of the Division Bench of the Calcutta High Court, the Reserve
B
Bank of India, .the Union of India and the State of West Bengal preferred
appeals before this court. The question considered in the above case was
"Is the endowment scheme of the Peerless Company a Prize Chit within
the meaning of Section 2(e) of the Prize Chits and Money Circulation
Schemes (Banning) Act?"
This court held that section 2(e) does not
contemplate a scheme without a prize and, therefore, the Endowment C
Cert.ificate Scheme of the Peerless Company was outside the Prize Chits
Banning Act: Appeals tiled by the Reserve Bank of India, the Union of
India and the State of West Bengal were accordingly dismissed. Chinnappa
Reddy, J. observed:
"It is open to them to take such steps as are open to them in
law to regulate schemes such a5 those run by the Peerless
Company to prevent exploitation of ignorant subscribers. Care
must also be taken to protect the thousand of employees. We
must also· record our dissatisfaction with some of the schemes
D
of the Life Insurance Corporation which appear to us to be
even less advantageous to the subscribers than the Peerless
Scheme. We suggest that there should be a complete ban on
forfeiture clauses in all savings schemes, including Life Insurance Policies, since these clauses hit hardest . the classes of
people who need security and protection most: We have explained this earlier and we do wonder ':"hether the weaker
sections of the people are not being made to pay the more
F
affluent sections' Robbing Peter to pay Paul? It was further
observed "We would also like to query what action the Reserve Bank of India and the Union of India are taking or proposing to take against the mushroom growth of finance and
investment companies" offering staggeringly high rates of interest to depositors leading us to suspect whether these compaE
G
nies are not speculative ventures floated to attract unwary and
credulous investors and capture their savings. One has only to
look at the morning's newspaper to be greeted by advertisements inviting deposits and offering interest at astronomic
rates. On January l, 1987 one of the national newspapers published from Hyderabad, where one of us happened to be spendH
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420
SUPREME COURT REPORTS
[1992] I S.C.R.
ing the vacation, carried as many as ten advertisements with
'banner headlines' covering the whole of the last page, a quarter of the first page and• conspicuous spaces in other pages
offering fabulous rates of interest. At least two of the advertisers offered to double the deposit in 30 months, 2000 for 1000,
10,000 for 5,000, they said. Another advertiser offered interest
ranging between 30 per cent to 38 per cetit for periods ranging
be.tween six months to five years. Almost all the advertisers
offered extra interest ranging between 3 per cent to 6 per cent
if deposits were made during the Cbristmas-Pongal season.
Several of them offered gifts and prizes. If the Reserve Bank
of India considers the Peerless Company .with eight hundred
crores invested in government securities, fixed deposits ~th
National Banks etc. unsafe for depositors, one wonders what
they have to say about the mushroom non-banking companies
which are accepting deposits, promising most unlikely return
and what action is proposed to be taken to protect the investors. It does not require much imaginahon to realise the adven-
. turous and precarious character of these businesses. Urgent
action appears to be called for to protect the public. While on
the one band these schemes encourage two vices affecting
public economy,. the desi~e to make quick and easy money
and the habit of excessive and wasteful consumer spending,
on the other hand the investors who generally belong to the
gullible and less affluent classes have no security whatsoever.
Action appears imperative."
Khalid, J., another learned Judge aggreeing with the judgment of
Chinnappa Reddy, J., further added his short but important concluding
paragraph as under :
"I share my brother's concern about the mushroom growth of
financial companies all over the country. Such companies have
proliferated. The victims of the schemes, that are attractively
put forward in public media, are mostly middle class and lower
middle class people. Instances are legion where such needy
people have been reduced penniless because of the fraud played
by such financial vultures. It is necessary for the authorities to
evolve fool-proof schemes to see that fraud is not allowed to
be played upon persons who are not conversant with the practice of such financial enterprises who pose themselves as benefactors of people."
Taking note of the weighty observations made by this Court, the
PEERLESS CO. v. R.B.I.[KASLIW AL, l.]
421
Reserve Bank of India in exercise of the powers conferred by Section 45
A
(J) and 45 (K) of the Reserve Bank of India Act, 1934 (hereinafter referred to as the Act) and of all the powers enabling it in. this behalf and
considering it necessary in the public interest issued certain directions by
notification No. DFC.55/DG(0)-87 dated the 15th May, 1987 (hereinafter
referred to as the 'directions of 1987'). The const.itutional validity of these
directions of 1987 was challenged by Timex Finance and Investment ComB
pany Ltd. (hereinafter referred t.o as 'Timex Company') by filing a writ
petition in the Calcutta High Court before the 'teamed Single Judge. The
learned Single Judge granted an interim ·Order in terms of prayers (g) and
(h) of the writ petition. The Reserve Bank of India aggrieved against the
mterim order filed an appeal before the Division Bench. A stay petition
was also moved on behalf of the Reserve Bank of India for staying the C
operation of the order dated 7th October, 1988 passed by the learned
Single Judge. After hearing the stay petition for sometime, the Division
Bench of the. High Court listed the appeal as well as the stay petition for
final disposal. The Division Bench of the High Court disposed of the
appeal as well as the writ petition by an order dated March 23, 1990 and
arrived to the following findings and conclusions:
D ·
"(a) Reserve Bank of India is empowered tci issue directions to the
residuary non,banking companies under the provisions of Section 45J and 45K of the Reserve Bank of India Act, 1934 for the
interest of thousands of depositors.
(b) However, to the extent such directions are found to be prohibitory or not workable and as such unreasonable must be held to
be beyond the powers of the Reserve Bank oflndia.
·
( c) The impugned directions providing that they represent irreducE
ible minimum for safeguarding the interest of and for preventing
exploitation of small and unwary depositors cannot be impleF
mented without suitable modification. It is not reasonably practi-
. cable to comply strictly with the directions as they stand by the
writ petitioners and the similarly situated companies. The Su·
preme Court in Peerless case (Supra) ... reserved the liberty to the
Reserve Bank of India to take such steps as are open to them in
law to regufate the schemes such as .those granted by the Peerless G _
to prevent exploitation of subscribers and to p10lect- lho11sands of
employees. The impugned directions without modifications will
_ run counter to the aforesaid directions of the Supreme Court.
(d) The.