# RESERVE BANK OF INDIA AND ORS v. PEERLESS GENERAL FINANCE AND INVESTMENT COMPANY LTD. AND ANR

- **Citation:** [1996] 1 S.C.R. 58
- **Court:** Supreme Court of India
- **Decided:** 1996-01-19
- **Case number:** Civil Appeal No. 37 of 1996
- **Bench:** S.C. Agrawal, G.B. Pattanajk
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/reserve-bank-of-india-and-ors-v-peerless-general-finance-and-investment-company-13878
- **Pages:** 31

## Headnote

Reserve Bank of India Act, 1934-Sectwn 45;K (3)-Pnwer of Reserve
Bank to issue directions-Scope of-The Section confers a wide power 011 the
Bank to issue directions and the said power is not restricted to or limited to the
receipt of deposits only-The Section is an ·eiiabling Provision-Held, enabling provision n1ust be so construed as to subserve the purpose for which it
has been enacted.
Residuary Non-Banking Companies (Reserve Bank) Directions
I987-Para 4A (as inserted by Notification dated I9.4.I993)-Enacted to
prevent evasion of directions contained in Paras 6 & 12 o_f 1987 DireLtionsHeld, Directions fall within the power conferred on the Bank to issue
directions--R.esiduary Non-Banking Companies (Res,erve Bank) Directions
I987-Paras 6 to I2.
E
Suggestio'tzs to U. 0.1 . ..:.._To create separate instrumentality to supervise
and enforce the provisions regulating the' fUnctioning1 of the
companies._,__iVhether ex.iSting p'rovisions needed further 'strengthening so as
to give greater protection IQ depositors-Whether the prov~sions, similar to
the provisions for Deposi(Protecrion Scheme in the Banking Act, 1987 of
,.
England can be introduced in India-l?.equirement for introduction in India.
;.....
F
G
Constitution of India, I950 Art. 14-Non-Banking Companies (Reserve
Bank) Directions, I987-Para 4A (as inserted by Notification dated
I9.4.I993-Fixing of Rs. 10 as uniform amount by Bank for expenses .for
brochure/ Application forms & servicing deposit or account-Held, not violative
n,f Article 14-Equal treatment ofIAnequal objects, transaction or persons, not
liable to be._ struck down as discri1ninatory unless there is simultaneously
absence of a rationattelation lo the object intended to be achieved by the law.
The 1987 Direction~~applicable to non·banking cornpanies and not to
co1nmercial banks-Held siinilarity not proved-Hence not discriminatory.
H
Art. I9( I)( g)-Non-banking Companies prohibited from recovering any
58
),.
RBI v. PEERLESS GENL. FINANCE
59
an1oullf us processing/nulintenance Gharge-Para 4A-Whether violative of A
Article 19( I )(g)-Held, not violative-SEBI (Mutual Funds) Re11ulation, 1993.
!11terpretation of Stalutes--Construction of enablillf? provisio11-To be
construed as to subserve the pu17HJse o.f lVhich it ivas enacted.
Words & Phrases :-"lncluding"--Meaning of
In order to regularise the non-hanking financial· companies, the
Reserve Bank of India Act, 1934 was amended by Act No. 55 of 1963 and
Chapter III-B (Section 45(H) to 45 (Q) was inserted. Section 45-K enables
the Reserve Bank of India, to collect information from non-banking
institutions as to deposits and to give directions to such institutions.
B
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After insertion of Chapter - 10-B the Reserve Bank issued Misc. NonBanking Companies (Reserve Bank) Directions, 1973 to regulate acceptance of deposits by non-banking companies. Respondent Company, a nonbanking financial company, sought exemption from complying with the
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above directions.· Exemption was granted only from para 4 of the Directions.
In 1977, Non-Banking Financial Companies (Reserve Bank) Directions, 1977 were issued wherein a ceiling was fixed in respect of the period
for which deposits could be accepted.
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The Respondent Company applied for the exemption from the said
provision of the 1977 Directions. During the pendency of the exemption
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application, Prize Chits and Money Circulation Schemes (Banking) Act
1978 was enacted by Parliament. The Reserve hank took the view that the
schemes of the Respondent Bank were covered by the Act. 1978, and
directed the Respondent Company to wind up its business and cancelled the
exemption which was granted already.
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The Respondent Company filed Writ Petition in the Calcutta High
Court with the plea that the 1978 Act did not apply to them. The writ G
Petition was allowed and the Reserve Bank filed appeal to the Supreme
Court. Supreme Court dismissed the appeal of the Reserve Bank with the
observation that the Bank should regulate such schemes to pr

## Text

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RESERVE BANK OF INDIA AND ORS.
v.
PEERLESS GENERAL FINANCE AND INVESTMENT
COMPANY LTD. AND ANR.
JANUARY 19, 1996
[S.C. AGRAWAL AND G.B. PATTANAJK,, JJ.]
Reserve Bank of India Act, 1934-Sectwn 45;K (3)-Pnwer of Reserve
Bank to issue directions-Scope of-The Section confers a wide power 011 the
Bank to issue directions and the said power is not restricted to or limited to the
receipt of deposits only-The Section is an ·eiiabling Provision-Held, enabling provision n1ust be so construed as to subserve the purpose for which it
has been enacted.
Residuary Non-Banking Companies (Reserve Bank) Directions
I987-Para 4A (as inserted by Notification dated I9.4.I993)-Enacted to
prevent evasion of directions contained in Paras 6 & 12 o_f 1987 DireLtionsHeld, Directions fall within the power conferred on the Bank to issue
directions--R.esiduary Non-Banking Companies (Res,erve Bank) Directions
I987-Paras 6 to I2.
E
Suggestio'tzs to U. 0.1 . ..:.._To create separate instrumentality to supervise
and enforce the provisions regulating the' fUnctioning1 of the
companies._,__iVhether ex.iSting p'rovisions needed further 'strengthening so as
to give greater protection IQ depositors-Whether the prov~sions, similar to
the provisions for Deposi(Protecrion Scheme in the Banking Act, 1987 of
,.
England can be introduced in India-l?.equirement for introduction in India.
;.....
F
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Constitution of India, I950 Art. 14-Non-Banking Companies (Reserve
Bank) Directions, I987-Para 4A (as inserted by Notification dated
I9.4.I993-Fixing of Rs. 10 as uniform amount by Bank for expenses .for
brochure/ Application forms & servicing deposit or account-Held, not violative
n,f Article 14-Equal treatment ofIAnequal objects, transaction or persons, not
liable to be._ struck down as discri1ninatory unless there is simultaneously
absence of a rationattelation lo the object intended to be achieved by the law.
The 1987 Direction~~applicable to non·banking cornpanies and not to
co1nmercial banks-Held siinilarity not proved-Hence not discriminatory.
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Art. I9( I)( g)-Non-banking Companies prohibited from recovering any
58
),.
RBI v. PEERLESS GENL. FINANCE
59
an1oullf us processing/nulintenance Gharge-Para 4A-Whether violative of A
Article 19( I )(g)-Held, not violative-SEBI (Mutual Funds) Re11ulation, 1993.
!11terpretation of Stalutes--Construction of enablillf? provisio11-To be
construed as to subserve the pu17HJse o.f lVhich it ivas enacted.
Words & Phrases :-"lncluding"--Meaning of
In order to regularise the non-hanking financial· companies, the
Reserve Bank of India Act, 1934 was amended by Act No. 55 of 1963 and
Chapter III-B (Section 45(H) to 45 (Q) was inserted. Section 45-K enables
the Reserve Bank of India, to collect information from non-banking
institutions as to deposits and to give directions to such institutions.
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After insertion of Chapter - 10-B the Reserve Bank issued Misc. NonBanking Companies (Reserve Bank) Directions, 1973 to regulate acceptance of deposits by non-banking companies. Respondent Company, a nonbanking financial company, sought exemption from complying with the
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above directions.· Exemption was granted only from para 4 of the Directions.
In 1977, Non-Banking Financial Companies (Reserve Bank) Directions, 1977 were issued wherein a ceiling was fixed in respect of the period
for which deposits could be accepted.
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The Respondent Company applied for the exemption from the said
provision of the 1977 Directions. During the pendency of the exemption
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application, Prize Chits and Money Circulation Schemes (Banking) Act
1978 was enacted by Parliament. The Reserve hank took the view that the
schemes of the Respondent Bank were covered by the Act. 1978, and
directed the Respondent Company to wind up its business and cancelled the
exemption which was granted already.
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The Respondent Company filed Writ Petition in the Calcutta High
Court with the plea that the 1978 Act did not apply to them. The writ G
Petition was allowed and the Reserve Bank filed appeal to the Supreme
Court. Supreme Court dismissed the appeal of the Reserve Bank with the
observation that the Bank should regulate such schemes to prevent exploitation of ignorant subscribers. (Peerless· I*)
In view of the observation made by the Supreme Court in (PeerlessH
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[1996] 1 S.C.R.
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1), the Reserve Bank issued Residuary Non-Banking Companies (Reserve
Bank) Directions, 1987.
After issuance of the 1987 Directions, Timex General Finance and
Investment Ltd. filed writ petition in High Court challenging the validity
of the said Directions. The High Court directed the Reserve Bank to
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modify the 1987 Directions. After the decision, the Respondent Company
got itself implcaded as respondent and obtained further directions from the
Court.
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The Reserve Bank filed an appeal to the supreme Court & the
Respondent Company filed Writ Petition under Article 32, challenging the
validity of the 1987 Directions. It was urged that the 1987 directions were
ultra vires the powers conferred on the bank and that Paragraphs 6 to 12
of the 1987 Directions were violative of the Rights guaranteed under
Article 19(1)(g). It was further contended that if Paragraphs 6 & 12 were
not struck down, the company would face closure and the 14 lakhs field
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officers would lose employment. The court upheld the validity of Paragraphs 6 & 12 and held that the Reserve Bank had power to issue
directions nnder Section 45-K (3) and further observed that working
capital is not needed every year,. it could not be mopped up out of
depositor's money and the company should make arrangement from its
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own resources. (Peerless-II)*
The Respondent Company, in order to avoitl compliance with the
requirements of Paragraph 6 & 12 of the 1987 Directions, resorted to the
conrse of splitting up the amounts received in respect of the first two
instalments : i.e. in yearly instalments of Rs. 100 for 10 years for
endowment sum of Rs. 1400 Rs. 30 of the first instalment and Rs. 30 of the
Second instalment was credited as processing charges and maintenance
charges respectively.
The Reserve Bank vide Notification dated April 19, 1993, amended
the 1987 Directions and inserted Paragraph 4A prohibiting the residuary
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non-banking companies from obtaining processing or maintenance charges
from the depositors/subscribers and further permitting to charge one time
initial sum, not exceeding Rs. 10 towards cost or expenses for issuing
brochnre/application forms, servicing of depositor's account etc.
Paragraph 4 was also amend<:d by Notification dated April 10, 1993
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reducing the maximum period for deposits from 120 months to 84 months.
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RBI v. PEERLESS GENL. FINANCE
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Aggrieved by the 1993 amendments the Respondent Company filed
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Writ Petition before the High Court challenging the validity of the
amendment. The High Court held that the Notification dated April 19,
1993, was ultra vires the power conferred on the Bank and the bank was
not competent to isrne the notification under Sections 45-J, 45-K or 45-L
of the Act.
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In appeal to the Supreme Court. by the Reserve Bank it was contended by the Respondent Company that the processing/maintenance
charges, being non-refundable in nature are not deposits, thus Paras 6 &
12of1987 would not apply on them; that Paragraph 4A is violative of the
right to equality guaranteed under Article 14, treating the unequals as
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equals by fixing uniform maximum ceiling of Rs. JO towards costs &
expenses; and treating the equals unequally by not exercising the control
on the similarly situated commercial banks : that the directions in para
4A are also violative of the rights guaranteed under Article 19(l)(g); that
the powers conferred on the bank under Section 45-K (3) is limited, as the
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words "relating to or connected with the receipt of deposits" in section 45K (3) are to be used in the restricted sense, in view of the words following
it. Further it was contended that in the scheme started by the Respondent
Company after Peerless fl, processing/maintenance charges was slightly
more than 4 % of the whole amount and in the new scheme the same is less
than 3% of the endowment snm; setting apart of the amount towards
processing and maintenance charges did not prejudicially affect the depositor because on maturity he was being paid the total amount paid by
him including the processing and maintenance charges, without causing
any loss to the depositor : and that the processing/maintenance charges,
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are less than 6% of the endowment sum payable on maturity as per
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Regulation SO of SEBI (Mutual Funds) Regulations 1993.
The Reserve Bank, on the other hand contended that the Bank was
competent lo issue directions contained in Para 4A; that the directions
contained in Para 4A were designed to prevent the evasion of the directions contained in Paras 6 & 12 of 1987 Directions, which were upheld
in Peerless-II* and the power to issue directions contained in paras 6 &
12 would necessarily encompass the power to issue directions to ensure
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that they are not avoided by contrivances or devices; and that powers
under section 45-K (3) are of very vide amplitude and the words "in
respect of any matter or connected with the receipt of deposits" occurring H
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SUPREME COURT REPORTS
[1996] 1 S.C.R.
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in the section arc not restricted by the words which follow these words.
Allowing the appeal, this court
HELD : 1.1. It is within the competence of the Bank to issue directions
in the n.ature contained in Paragraph 4A of the Residuary Non-Banking
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Companies (Reserve Bank) Directions 1987. The Bank has been given power
. to issue directions in respect of any matter relating to or connected with the
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· receipt of deposits. The words " in respect of any matters relating to or
connected with the receipt of deposits" in section 45K(3), confer a wide power
on the Bank to issue directions and the said power is not restricted to or
limited to the receipt of deposits only. The amplitude of this power cannot
be curtailed by the words "including the rates of interest payable on such
deposits and the periods for which the deposits may be received" in section
45-K(3). Though the word "including" is generally used in extensive sense
to bring within the ambit of the provision, matters referred to in the inclusive
clause which normally would have been covered by the provisions, but that
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is not always so. Many times the legislature uses an inclusive phrase to
specifically include a matter by way of abundant caution. Having regard to
the object and purpose underlying the enactment of section 45K, the words
"including the rate of interest payable on such deposits and the period for
which the deposits may be received" do not seem to be restricting the ambit
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of the words "in respect of any matters relating to or connected with the
receipt of deposits". Which must, therefore be given their natural
meaning. [81-B-D)
*Peerless General Finance & Investment Company Ltd. v. Reservee
Bank qf India, [1992) 2 SCC 343, relied on.
Madhav Rao Jivaji Scindia v. VO!, [1971] 1 SCC, 85, distinguished.
1.2. Section 45 K (3) of the Reserve Bank of India Act is an enabling
provision enacted to empower the Bank to regulate the conditions on
which the deposits may be accepted by non-banking companies or institutions and to prevent malpractices in the matter of acceptance of such
deposits. Such an enabling provision must be so construed as to subserve
the purpose for which it has been enacted. In the matter of construction of
enabling statutes, the principle applicable is that if the legislature enables
something to be done, it gives power at the same time, by necessary
implication, to do everything which is indispensable for the purpose of
carrying out the purpose in view. The power to make a law with respect
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RBI v. PEERLESS GENL. FINANCE
63
to any subject, carries with it all the ancillary and incidental powers to A
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prevent evasion. [79-C, 82-C]
*Sodhi Transport Company v. State of U.P., [1986] 1 SCR, 939,
referred to.
Francis Bennion, on statutory Interpretation-2nd Edition, Crais on
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Statutes, 7th Edition, referred to.
1.3. Paragraph 4A which has been inserted by notification dated
April 19, 1993, in the 1987 Directions, falls within the power conferred
on the bank to issue directions under Section 45 K(3) of Reserve Bank of
India Act, 1934. The processing/maintenance charges or other similar
charges received by a non-banking company from the subscriber to the
schemes are received with the avowed purpose of processing the maintenance of the deposits by the subscriber under the scheme. These amounts
are received as part of the instalments paid by the subscriber. They are
undoubtedly related to or connected with the receipt of deposits and it is
not possible to say that the said charges are not matters related to or
connected with the receipt of deposits. The directions contained in paragraph 4A, seeks to prevent evasion of the directions contained in Paragraphs 6 & 12 of 1987 Directions. If the bank is competent to give the
directions contained in Paragraphs 6 & 12 of the 1987 Directions, it stands
to reason that the bank should be competent to give directions which could
prevent evasion of those directions and secure their effective implementation. [82-A, B, DI
* Peerless General Finance & Investment Company Ltd. v. Reserve
Bank of India, [1992] SCC 343, referred to.
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2.1. The fixation of uniform amount of Rs. 10 as per Paragraph 4A
inserted in the 1987 Directions, does not mean that Paragraph 4A, suffers
from the vice of discrimination on the ground that unequals are being
treated equally. The equal treatment of unequal objects, transaction or
persons, is not liable to be struck down as discriminatory unless there is
simultaneously absence of a rational relation to the object intended to be
achieved by the law. The uniform amount of Rs. 10, prescribed in Paragraph 4A, is for the expenses for brochure/application form and for
servicing the depositors account, which would be incurred by the residuary
non-banking companies, in respect of their schemes. The said charges
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SUPREME COURT REPORTS
[ 1996] 1 S.C.R.
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would not vary from person to person and would normally be the same
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in all the cases. [83-C, DJ
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Jalan Trading Co. (Pvt.) Ltd. v. Mill Mazdoor Union, [1967] 1SCR15,
referred to.
2.2. Paragraph 4A cannot be held to be violative of Article 14 of the
Constitution on the ground of discrimination based on the non-banking
companies being treated differently from commercial banks in the matter
of service charges, in view of the fact that levying of servke charges in
respect of recurring deposit scheme similar to that operated by the
respondent, is not proved in respect of Commercial Banks. [l!3-F]
3.1. Paragraph 4A, introduced in the 1987 Directions by way of
notification dated April 19, 1993, is not violative of the rights guaranteed
nuder Article 19(1)(g) of the constitution. The fact that processing charges
and maintenance charges raised by Peerless are less than 6% of the
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endowment snm payable on maturity, cannot be the basis for holding that
Paragraph 4A, imposes unreasonable restrictions on the right guaranteed
under Article 19(1)(g) of the Constitution. The Working of Peerless and
residuary non-banking companies, cannot be equated with that of mutual
funds governed by SEBI (Mutual Funds) Regulation, 1993. The Schemes
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operated by Peerless are also not comparable with those of Mutual Funds.
Though under the previous scheme, Peerless was receiving by way of
processing/maintenance charges 30% of the first two instalments and in
the latter scheme 18% of the first instalment, bnt it is not disputed that a
number of schemes are discontinued after the payment of one or two
instalments and the subscriber gets only the amount of deposit excluding
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the processing charges and maintenance charges. [87-F, G; 86-C-F]
3.2. The observations made by this court in the context of Paragraphs 6 & 12 of the 1987 Directions, are equally applicable in respect of
the directions contained in Paragraph 4A introduced in the 1987 DirecG tions, whereby the residuary non-banking companies are prohibited from
recovering any amount by-way of processing/maintenance charges or any
such charge from the depositor and are required to arrange for the
working capital from their own resources. [86-B-C]
Peerless General Finance & Investment Co. Ltd. v. Reserve Bank of
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India, [1992] 2 SCC 343, relied on.
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RBI v. PEERLESS GENL. FINANCE [AGRAWAL, J.]
65
4, Union of India may consider whether it would be advisable to
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create a separate instrumentality which may be entrusted with the task of
supervision and enforcement of the provisions regulating the functioning
of these companies, The Union Government may also consider whether the
existing provisions need to be further strengthened so as to give greater
protection to the interests of the depositors. In England the Banking Act,
1987 contains provisions for Deposit Protection Scheme for the protection
of the depositors. It may be considered whether provisions on similar lines
could be introduced here. (88-E-G]
*Reserve Bank of India v. Peerless General Finance & Investment Co.
B
Ltd., (1987] 2 SCR 1, referred to.
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CIVIL APPELLATE JURISDICTION: Civil Appeal No. 37 of 1996.
From the Judgment and Order dated 3.5.95 of the Calcutta High Court
in C.O. No. Nil of 1993.
H.N. Salve, H.S. Parihar, Kuldeep S. Parihar, and Ch. Mukund Murty for
the appellants.
Somnath Chatterjee, R.F. Nariman, B. Lahiri, A. Chaterjee and S.
Sukumaran for Mis. JBD & Co. for the Respondent No. I
N.N. Gooptu, West Bengal, Ms. Radha Rangaswamy for Peerless Officers
Association.
Ashok Desai, S. Sukumaran and Ramesh Babu M.R. for the Respondents.
Praveen Kumar for the Intervenor.
The Judgment of the Court was delivered by
S.C. AGRAWAL, J. Special Leave granted.
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This appeal directed against the judgment of the Calcutta High Court
dated May 3, 1995, is in the third round of the litigation between the Peerless G
General Finance & Investment Company Ltd. (hereinafter referred to as 'Peerless') and the Reserve Bank of India (hereinafter referred to as 'the Bank').
Peerless was incorporated in 1932 as a limited company under the
provisions of the Indian Companies Act, 1913 with the name Peerless General
Insurance and Investment Company Ltd. It was carrying on life insurance lI
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[1996] 1 S.C.R.
business. After the enactment of the life Insurance Corporation Act, 1956
Peerless could not carry on life insurance business and if changed its. name
to 'Peerless General Finance and Investment Co. Ltd.' and is now carrying
on finance and investment business. It offers small saving schemes to the
public at large wherein the subscribers are required to pay a fixed amount as
subscription on yearly, half-yearly or quarterly basis for a fixed number of
years and oh the expiry of the said period, the subscriber is paid a sum of
money called Endowment sum, which is the face value of the certificate, and
certain additional amounts by way of bonus. The said scheme offered by
peerless are some what similar to Recurring Deposit schemes run by commercial banks.
The business transacted by the banking companies is regulated by the
banking Regulation Act, 1949. Since non-banking companies started receiving deposits from general public on a large scale, it became necessary to
make suitable provisions for regulating the sani"e. The Reserve Bank of India
Act, 1934 (hereinafter referred to as 'the Act') was amended by Act No. 55 of
1963 and chapter III-B (Sections 45 (H) to 45(Q) which contains provisions
relating to non-banking institutions receiving deposits and finanCial i?-stitutions was inserted in the Act. In Section 45-I various
expressions, viz.,
'Company\ 'Corporation', 'Deposit', 'Financial institution', 'firm' and 'nonbanking institution' have been defined Section 45-J empowers the Bank to
regulate or prohibit the issue of prospectus or advertisement by a nonbanking institution soliciting deposits of money from the public. 45-K enables the Bank to collect information from non-banking institutions as to
deposits and to give directions to such institutions. Section 45-L empowers
the Bank to call for information from financial institution and to give directions to such institutions. Section 45-Q provides that the provisions of Chapter - III B shall have effect not-witl1standing 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. After the insertion of Chapter III-B in
the Act, the Bank issued three sets of directions to regulate acceptance of
deposits by non-banking companies, categorising them into financial, nonG
financial and miscellaneous companies. Non-Banking Financial Companies
(Reserve Bank) Directions, 1966 related to companies (other than an insurance company, or stock exchange or stock broking company) engaged in
hire-purchase finance, housing finance, investments, loan equipment leasing,
mutual benefit business etc. Non-Banking Non-Financial Companies (ReH
serve Bank) Directions, 1966 related to a company which was not a banking
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RBI v. PEERLESS GENL. FINANCE [AGRAWAL, J.]
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company nor a financial company refeITed lo above. Miscellaneous NonA
Banking Companies (Reserve Banking) Directions, 1973 related to a company engaged in the business of collecting moneys in one lunipsum or
otherwise by sale of units, certificates or other instruments and utilising the
moneys so collected for giving to a specified number of subscribers by lot or
draw, prizes or gifts etc. and refunding the money with or without interes\ to
those who have not won any prize etc., or conducting any other form of chit B
or kuri or any other similar business. It was found that a vast majority of the
non-banking companies accepting deposits were non-financial companies
and in order to more effectively regulate the deposit accepting activities of
these companies, the Companies (Amendment) Act, 1974 was enacted and
Sections
58-A
and
58-B
were
inserted
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the
Companies Act, 1956. Section 58-A makes provisions for regulating the
acceptance of deposits by such non-banking non-financial companies and
vests the said power in the Central Government. In Delhi Cloth and general
Mills Etc. v. Union of India Etc., [1983] 3 <SCR 438 this Court has upheld the
validity of Section 58-A and has rejected the contention that it was violative
of the rights guaranteed under Articles 14 and 19(1)(g) of the Constitution.
After the issuance of the Miscellaneous Non-banking Companies (Reserve Bank) Directions, 1973, Peerless sought exemption from complying
with the said directions and such exemption was granted to it by the Banking
from the provisions of Paragraph 4 of the said directions in so far as those
provisions restricted the acceptance of subscriptions under the schemes ·Upto
25% of the paid-up capital and free reserve fund. While granting this
exemption certain conditions were, however, imposed. In 1974, a study group
headed by Dr. J.S. Raj was appointed by the Bank to examine the existing
statutory provisions with a view to assessing their adequacy in regulating the
conduct of business by non-banking companies in the context of the
monetary and credit policy laid down by the Bank from time to time and to
suggest measures for further tightening up the provisions as to ensure that the
activities of such companies, in so far as they pertained to the acceptance of
deposits, investments, lending operations etc. sub.served the national interest
and served more effectively as adjuncts to the regulation of the monetary and
credit policies of the country besides affording the degree or protection to
the depositors' moneys. Having regard to the recommendations of the Raj
Committee, the Bank, in 1977 issued the Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977 and the non-Banking Financial
Companies (Reserve Bank) Directions, 1977. In the Miscellaneous Non:
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(1996] 1 S.C.R.
Banking Companies (Reserve Bank) Directions , 1977, there was departure
from the earlier directions of 1973 in the sense that for the first time a ceiling
was fixed in respect oi the period for which deposits could be accepted and
that the said period could not be more than thirty six months. Peerless
applied to the Bank for being granted exemption from the provisions of the
said Directions of 1977. While the said matter was pending, the Prize Chits
and Money Circulation Schemes (Banning) Act, 1978 was enacted by
Parliament and it came into force with effect from December 12, 1978. The
Bank took the view that the schemes conducted by Peerless were covered
by the provisions of the said Act and as Peerless, was prohibited from doing
fresh business it was required to wind up its existing business under the Act.
The Bank was of the view that there was no question of granting any
exemption to Peerless from the provisions of the Directions of 1977. The
Bank, however, considered the claim of Peerless for exemption on merits and
four.d that it was necessary to cancel the exemption already granted. Thereupon Peerless filed a writ petition in the Calcutta High Court for a declaration
that the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 did
not apply lo the business carried on by it. The said writ petition of Peerless
was allowed by a Division Bench of the Calcutta High Court and it was
declared that the business carried on by Peerless did not fall within the
mischief of the Prize Chits and Money Circulation Schemes (Banning) Act,
1978. The said view of the Division Bench of the High Court was affirmed
by this Court in Reserve Bank of India v. Peerless General Finance &
Investment Co. Ltd., (1987] 2 SCR l, (hereinafter referred to as 'Peerless!').
The Coert, after examining the various schemes offered by Peerless, held that
the said schemes were not covered by the expression 'prize chits' as defined
in Section 2(e) of the said Act. While upholding the decision of the Calcutta
High Court in that regard, it was, however, observed :
"The appeals filed by the Reserve Bank of India, the Union of India
and the Slate of West Bengal are accordingly dismissed. It is open
to them to take such steps as are open to them in Jaw to regulate
schemes such as those run by the Peerless Company to prevent
exploitation of ignorant subscribers. Care must also be taken to
protect the thousands of employees."
In this context, Chinnappa Reddy J. (who delivered the main judgment) has referred to the mushroom growth of financial and investment
H companies offering staggeringly high rates of interest to depositors leading
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RBI v. PEERLESS GENL. FINANCE [AGRAWAL, J.]
69
the court to suspect whether these companies are not speculativ~ ventures
floated to attract unwary and credulous investors and capture their savings
and had said :
"It does not require much imagination to realise the adventurous and
precarious character of these businesses. Urgent action appears to be
called for to protect the public. While on the one hand these
schemes encourage- two vices affecting public econo1ny, the desire
to make quick and easy money and the habit of excessive and
wasteful consumer spending, on the other hand the investors who
generally belong to the gullible' and less affluent classes have no
security whatsoever. Action appears imperative." (p.46)
Khalid, J, in his concurring Judgement, has expressed the same sentiments when he said :
"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." (P. 12)
Keeping in view the observations of this Court in peerless I, the Bank
issued Residuary Non-Banking Companies (Reserve Bank) Directions, 1987
(hereinafter referred to as the '1987 Directions') vide notification dated May
15, 1987. The said directions are stated to have been issued in exercise of
the powers conferred by Sections 45-J and 45-K of the Act. Paragraph 2 of
the 1987 Directions prescribes that the Directions are applicable to every
residuary non-banking institution, being a company, which receives any
deposit under any scheme or arrangement by whatever name called, in one
lumpsum or in instalments by way of contributions of subscriptions or by sale
of the units or certificates or other instruments, or in any other manner and
which, according to the definitions contained in Non-Banking Financial
Companies (Reserve Bank) Directions, 1977 or, as the case may be, the
Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977, is
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SUPREME COURT REPORTS
[ 1996] 1 S.C.R.
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not an equipment leasing co1npany, a hire purchase finance company, a
housing finance company, an insurance company, an investment company, a
loan company. a mutual benefit financial company and a miscellaneous nonbanking company. Paragraph 4 initially provided that on and from 15th May,
1987, no residuary non-banking company shall receive any deposit repayB
able on demand or on notice or after a period of less than 12 months or more
than 120 months from the date of receipt of such deposit, or renew any
deposit received by it whether before or after that date, unless such deposit,
on renewal, is repayable not earlier than 12 months and not later than 120
months from the date of such renewal. Paragraph 5 prescribes that the
minimum rate of return, shall not be less than the amount calculated at the
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of 10% per annum (to be compounded annually) on the amount
deposited. By way of security for depositors. Paragraph 6 made provision
regarding investment of the amounts which are received by a residuary nonD
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banking company in the following terms :
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"6. On and from 15th May, 1987.
(1) every residuary
non-banking company shall deposit and
keep deposited the fixed deposits with public sector banks or invest
and keep invested in unericumbered approved securities (such
securities being valued at their market value for the time being), or
in other investments, which in the opinion of the company are safe,
a sum which shall not, at the close of business on 31st December
1987 and thereafter at the end of each half year that is 30th June 31st
December be less than the aggregate amounts of the liabilities to the
depositors whether or not such amounts have become payable;
Provided that of the sum so deposited or invested.
(a) not less than 10 per cent shall be in fixed deposits with any of
the public sector banks;
(b) not less than 70 per cent shall be in approved securities;
(c) not more than 20 per cent or ten times the net owned funds of
the company, whichever amount is less, shall be in other investments.
Provided that such investments shall be with the approval of the
Board of Directors of the Company.
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RBI v. PEERLESS GENL. FINANCE [AGRAWAL, J.]
71
x
x
x
x
x
x
x
x"
Jn Paragraph 7 provision is made for abolition of forfeiture and it is
directed that on and from 15th May, 1987 no residuary non-banking company shall forfeit any amount deposited by a depositor, or any interest,
premium bonus or olher advantage accrued thereon. Paragraph 8 prescribes
the particulars to be specified in an application form soliciting deposits.
Paragraph 9 requires that every residuary non-banking company shall furnish
to every depositor a receipt for every amount which has been or which may
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be received by the company by way of deposit before or after the commencement of the 1987 Directions. Paragraph 10 makes provision for keeping
register/registers of deposits and particulars to be entered therein. Paragraph C
11 prescribes information which must be included in the report of the Board
of Directors that is laid before the company in general meeting. Paragraph 12
provides as under :
"Every residuary non-banking company shall disclose as liabilities
in its books of accounts and balance sheets, the total amount of D
deposits received together with interest, bonus, premium or othe1
advantage, accrued or payable to the depositors."
Paragraph 13 prescribes that copies of the audited balance sheet and
the profit and loss account together with a copy of the report of Board of
Directors should be furnished to the Bank within 15 days of the meeting of
the company under Section 217(1) of the Companies Act, 1956. Paragraph
14 requires a residuary non-banking company to submit to the Bank returns
furnishing information on matters specified in the Schedule to the Directions.
Paragraph 16 makes provision regarding advertisments and statements in lieu
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of advertisement which are issued by a residuary non-banking company.
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Paragraph 19 empowers the Bank, if it considers it necessary for avoiding any
hardship or any other just and sufficient reason, to grant extensions of time
to comply with or exempt any company or class of companies, from all or
any of the provisions of the Directions either generally or for any specified
period subject to such conditions as the Bank may impose. Paragraph 20 lays
down that nothing contained in Paragraph 19 of the Non-Banking Financial
Companies (Reserve Bank) Directions, 1977 shall apply to the residuary nonbanking companies.
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After the issuance of the 1987 Directions, Timex General Finance &
Investment Co. Ltd. filed a writ petition challeging the validity of the said H
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[1996] l S.C.R.
directions before tl1e C1!cutta High Court. The said writ petition was disposed of by a Division Bench of the Calcutta High Court whereby certain
directions were given to the Bank to modify the 1987 Directions and make
them reasonable and workable to safeguard the interest of depositors and
protect the employees. After the said decision, Peerless got itself impleaded
as a party-respondent in the said writ petition and obtained further directions
from the High Court. The said orders of the High Court were challenged by
the Bank before this Court. Peerless also filed a writ petition under Article
32 of the Constitution challenging the validity of the 1987 Directions. The
appeals of the Bank as well as the writ petition filed by Peerless were
disposed of by this Court by its judgment in Peerless General Finwice and
Investment Co. Ltd. & Anr. v. Reserve Bank ~f India, (1992] 1 SCR 406,
(hereinafter referred to a 'peerless II').
In Peerless II the main controversy centred round Paragraphs 6 and 12
of the 1987 Directions. It was urgerl that the 1987 Directions were ultra vires
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the power conferred on the Bank by Sections 45-J and 45-K of .the Act
inasmuch as none of these sections authorises the Bank to frame any
directions prescribing the manner of investment of deposits received of the
method of accountancy to be followed or the manner in which its balance
sheets and business of accounts are to be drawn up. The said contention was
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negatived by this Court. Kasliwal J. has held that the Bank was competent
and authorised to issue the 1987 Directions in exercise of powers conferred
under Section 45-K(3) of the Act which confers a wide power on the Bank
to give any direction in respect of any matter relating to or connected with
the receipt of deposits and that under the said provision the Bank is entitled
to give directions with regard to the manner in which the deposits are to be
invested and also the manner in which such deposits are to be disclosed in
the balance sheets or books of accounts of the company. Ramaswamy J., in
his concurring judgment, while agreeing with the view of Kasliwal J. that the
directions could be upheld under Section 45-K(3), has further held that the
directions could also be upheld under Section 45-L of the Act.
As regards the challenge to the validity of the provisions contained in
paragraphs 6 and 12 of the 1987 Directions, on the ground of being violative
of the right guaranteed under Article l9(1)(g) of the Constitution, it may be
stated that Peerless was following the actuarial method which is adopted by
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insurance companies and was treating a certain percentage of the amount
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RBI v. PEERLESS GENL. FINANCE [AGRAWAL, J.]
73
collected by way of each instalment under the certificates of deposits as part
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of the income and it was retained and taken to the profit and loss account
and it was utilised for payment of commission to the agents and for incurring
other expenses. Since such a course was impermissible under Paragraphs 6
and 12 of the 1987 Directions, the validity of the said directions was
challenged on the ground that the same were violative of the right guaranteed B
under Article 19(l)(g) of the Constitution. On behalf of Peerless it was
submitted that it is inherent in the business carried ·on by Pe~rless and other
residuary non-banking companies that Lhe working capital is generated out
of the subscriptions received from the certificate holders and such business
comprises in collecting subscriptions from depositors either in lumpsum or
in instalments and such deposits are paid back with the guaranteed accretions, bonus, interest, etc. in terms of the contract at the end of the stipulated
term and through business such companies have rendered great and commendable service to the nation in 1nobilising small savings and giving a
boost to the movement of capital formation in the country. Ir was submitted
that though interest of depositors is an important consideration but the said
interest is not impaired in any manner whatsoever by the method of accountc
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ancy that was being followed by Peerless and by all similar companies
namely, appropriation of a part of the subscription to the profit and loss
account and meeting the working capital requirements out of the same.
Arguments were also advanced on behalf of All India Field Officers AssociaE
tion which claimed to represent 14 lac field officers engaged by Peerless on
the basis of individual contracts of engagements. It was submitted that they
earn their livelihood solely by Collecting business for Peerless and for
collecting such business Peerless pays them commission at a contractual
agreed percentage on the value of business collected and that the said field
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officers have to meet all expenses for procuring such business such as
travelling expenses, boarding, lodging, office and administrative expenses
etc. out of such commission and they have to under take Jong tours and have
to travel into remote villages to reach the small depositors. It was submitted
that if the 1987 Directions were upheld, the undertaking of Peerless will face
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inevitable closure and almost 14 lac field officers will lose their only source
of livelihood and will be virtually thrown on the streets and thus any
restriction which would be prohibitive or which would result in closure of
the undertaking of Peerless would be against public interest. The said
contentions were rejected by the Court. It was held :
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KASLIWAL, J.
[1996] 1 S.C.R.
"Jn our view the Reserve Bank is right in taking the stand that if
these companies want to do their business, they should invest their
own working capital and find such resources elsewhere with which
the Reserve Bank has no concern". (P.