# RESERVE BANK OF INDIA v. PEERLESS GENERAL FINANCE & INVESTMENT CO. LTD. 'i ORS. AND VICE VERSA

- **Citation:** [1987] 2 S.C.R. 1
- **Court:** Supreme Court of India
- **Decided:** 1987-01-22
- **Case number:** Civil Appeal Nos. 3562 & 3563 of 1986
- **Bench:** O. Chinnappa Reddy, V. Khalid
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/reserve-bank-of-india-v-peerless-general-finance-investment-co-ltd-i-ors-and-9460
- **Pages:** 46

## Headnote

A
B
Interpretation of statute-Text and Context bases value of,
explained-Whether the two clauses (i) and (ii) in section 2(e) of the
definition of "Prize chit" in Prize Chits and Money Circulation Scheme
(Banning) Act, 1978 are to be read disjunctively-Phrase "for all or any C
of the following purposes", construction of.
Prize Chits and Money Circulation Scheme (Banning) Act, I978
section 2(e)-Definition of "prize chit"-Whether the Endowment
Certificate Scheme of the Peerless Company attracts the provisions of
~~
D
Constitution of India, I950, Articles 38, 39, 41 and 43-Goal of
minimising inequalities of income-Failure of the Life Insurance Corporation in this regard deprecated-Need to improve their efforts to
devise several methods to serve the poorer. sections of the people,
stressed.
E
The Peerless General Insurance and Investment Co. Ltd. was
incorporated in 1932. After the nationalisation of the business of life
insurance, the name of the company was changed to "the Peerless
General Finance and Investment Co. Ltd." For over a quarter of a
century now, the business of the company has been that of finance and F
investment. The company offers three schemes, the principal of which
is the Endowment Certificate Scheme. Under this scheme, a subscriber
is required to pay a fixed annual subscription for a fixed number of
years varying between the minimum of 10 years an!' the maximum of 30
years. On the expiry of the period, the subscriber will be paid by the
company a sum of money called the Endowment Sum which is the face G
value of the Certificate. The subscriber is also entitled to be paid a
guaranteed fixed bonus. If any instalment, that is, any amount of annual subscription is not paid within the stipulated period and period of
grace, the Certificate lapses unless it has acquired a surrender value. A
Certificate acquires surrender value after the expiry of three years from
the date of commencement if the subscription for two full years has H
I
2
SUPREME COURT REPORTS
[1987] 2 S.C.R.
A been paid. A Certificate which has not acquired surrender value lapses
on non-payment of instalments and the amounts paid become forfeit to
the company. A lapsed certificate may, however, be revived at any time
before the expiry date of maturity on payment of all dues together with
interest at one paisa per rupee per month. There is also provision in the
8
scheme for conversion of the Certificate into a paid up Certificate, the
paid up amount to be paid at the end of the period, but without bonus.
A person purchasing a CertiticatE' automatically becomes entitled to a
free accident insurance policy under a group insurance scheme.
A noticeable feature of the scheme is the remarkably low yield to
the subscriber on his investment. Not only that, the subscriber is always
C at the losing end. Despite the same, the message of Peerless is made to
penetrate the rural areas to tap tbe small savings of the poor ignorant
villagers through a special structure of agents, special agents, suborganizers, special organizers and so on chosen from amongst those
noted for their social political or official connections. The agents' Como mission was 30% (now 35%) of the first year's subscription and 5% only
of subsequent years' subscription. The incentive of 30% of the collection
of the subscription of the first year automatically operates as a disincentive for collecting subscriptions of subsequent years resulting in heavy
default in paymenf and forfeiture of subscriptions earlier paid. The first
subscription is literally shared between the company and its agents
E
F
G
H
under the method of accountancy adopted by the company treating the
entire amount as income and not liability of the company. The company
adopted the "actuarial system" of accountancy followed by the Life
Insurance Corporation, though the company itself does not and cannot
do insurance business. However, the company has now deleted the
"forfeiture clause''. and everyone is entitled to payment after

## Text

_Characters 0–39,926 of 119,422. This is a partial read: ask again with offset=39926 for what follows._

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RESERVE BANK OF INDIA
v.
PEERLESS GENERAL FINANCE & INVESTMENT CO. LTD.
'i
ORS. AND VICE VERSA
JANUARY 22, 1987
[O. CHINNAPPA REDDY AND V. KHALID, JJ.]
A
B
Interpretation of statute-Text and Context bases value of,
explained-Whether the two clauses (i) and (ii) in section 2(e) of the
definition of "Prize chit" in Prize Chits and Money Circulation Scheme
(Banning) Act, 1978 are to be read disjunctively-Phrase "for all or any C
of the following purposes", construction of.
Prize Chits and Money Circulation Scheme (Banning) Act, I978
section 2(e)-Definition of "prize chit"-Whether the Endowment
Certificate Scheme of the Peerless Company attracts the provisions of
~~
D
Constitution of India, I950, Articles 38, 39, 41 and 43-Goal of
minimising inequalities of income-Failure of the Life Insurance Corporation in this regard deprecated-Need to improve their efforts to
devise several methods to serve the poorer. sections of the people,
stressed.
E
The Peerless General Insurance and Investment Co. Ltd. was
incorporated in 1932. After the nationalisation of the business of life
insurance, the name of the company was changed to "the Peerless
General Finance and Investment Co. Ltd." For over a quarter of a
century now, the business of the company has been that of finance and F
investment. The company offers three schemes, the principal of which
is the Endowment Certificate Scheme. Under this scheme, a subscriber
is required to pay a fixed annual subscription for a fixed number of
years varying between the minimum of 10 years an!' the maximum of 30
years. On the expiry of the period, the subscriber will be paid by the
company a sum of money called the Endowment Sum which is the face G
value of the Certificate. The subscriber is also entitled to be paid a
guaranteed fixed bonus. If any instalment, that is, any amount of annual subscription is not paid within the stipulated period and period of
grace, the Certificate lapses unless it has acquired a surrender value. A
Certificate acquires surrender value after the expiry of three years from
the date of commencement if the subscription for two full years has H
I
2
SUPREME COURT REPORTS
[1987] 2 S.C.R.
A been paid. A Certificate which has not acquired surrender value lapses
on non-payment of instalments and the amounts paid become forfeit to
the company. A lapsed certificate may, however, be revived at any time
before the expiry date of maturity on payment of all dues together with
interest at one paisa per rupee per month. There is also provision in the
8
scheme for conversion of the Certificate into a paid up Certificate, the
paid up amount to be paid at the end of the period, but without bonus.
A person purchasing a CertiticatE' automatically becomes entitled to a
free accident insurance policy under a group insurance scheme.
A noticeable feature of the scheme is the remarkably low yield to
the subscriber on his investment. Not only that, the subscriber is always
C at the losing end. Despite the same, the message of Peerless is made to
penetrate the rural areas to tap tbe small savings of the poor ignorant
villagers through a special structure of agents, special agents, suborganizers, special organizers and so on chosen from amongst those
noted for their social political or official connections. The agents' Como mission was 30% (now 35%) of the first year's subscription and 5% only
of subsequent years' subscription. The incentive of 30% of the collection
of the subscription of the first year automatically operates as a disincentive for collecting subscriptions of subsequent years resulting in heavy
default in paymenf and forfeiture of subscriptions earlier paid. The first
subscription is literally shared between the company and its agents
E
F
G
H
under the method of accountancy adopted by the company treating the
entire amount as income and not liability of the company. The company
adopted the "actuarial system" of accountancy followed by the Life
Insurance Corporation, though the company itself does not and cannot
do insurance business. However, the company has now deleted the
"forfeiture clause''. and everyone is entitled to payment after the
maturity period of the certificate.
Section 45K of the Reserv" Bank of India Act empowers the
Reserve Bank to collect informatfon from Non-Banking Institutions as
to deposits and to give directions iI1 the public interest, in particular "in
respect of any matters relating lo 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." Section 45L empowers
the Reserve Bank to call for inforrnation from financial institutions and
to give directions, in particular directions relating to the conduct of
business by them, etc. Taking advantage of the 1970 Report of the
Banking Commission's Study Group headed by Dr. Bhabatosh Dutta
on the role of various non-banking financial institutions, the Reserve
Bank purporting to exercise its powers under Sections 45L and 45K of
-L.
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R.B.I. v. PEERLESS GENERAL FINANCE
3
the Reserve Bank of India Act gave certain directions called "Miscellaneous Non-Banking Companies (Reserve Bank) Directions 1973". Para
4(a) prescribed six months as the minimum period for which a Miscellaneous Non-Banking Company could accept a deposit, but no
maximum period was prescribed. Paragraph 4(b)(ii) prescribed a ceiling of 25% of the aggregate of the paid up capital and free reserve of the
company in the case of deposits accepted hy Miscellaneous NonBanking Companies. Paragraph 13 enabled the Reserve· Bank to
exempt any company or class of companies from, all or any of the
provisions of the directions either generally or for a specified period, if
it considered necessary for avoiding any hardship or for any other just
and sufficient reason.
On September 14, 1973 the Peerless Company addressed a letter
A
B
c
to the Reserve Bank of India explaining the nature of their business and
claiming that their business was outside the scope of the directions
issued by the Reserve Bank, while pointing out that their business was a
special type, that it was carried on scientific lines and actuarial principles, that over 90% of the concerned public fund was invested in
D
Government securities and in nationalised Banks. The Reserve Bank of
India by their order dated December 3, 1973 exempted the company
from the provisions of paragraph 4 of the notification in so far as those
provisions restricted the acceptance of subscriptions under the scheme
upto 25% of the paid-up capital and free reserve fund. Certain conditions were, however, imposed. The company was directed to transfer E
every year to the reserve fund a sum not less than 50% of the profit after
taxes. The company was directed not to declare any dividend at rates
higher than 6% and 7% on ordinary and preferential shares till the free
reserve became equal to the paid-up capital. The company was also
required to maintain not less than 75% of its total assets in the form of
investments and Government Trustee-securities, etc. The company was F
directed to submit every year a certificate from their Auditors in regard
to compliance with the conditions imposed. The exemption was to be
reviewed every two years. The said exemption was granted, having
regard to the satisfactory financial position of the Peerless and the fact
that it was a well established one and having regard to the certificate
furnished by the actuarial consultant of the Peerless supported by data.
In the year 1974, there was yet another Study Group headed hy
Dr. J .S. Raj appointed this time by the Reserve Bank. In para 6.21 the
Study Group made its recommendations for a total bllO on the conduct
of prize chits of the kind described by them in par11graph 6.3. Simple
G
Recurring Deposits Schemes were not contemplated.
H
A
B
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4
SUPREME COURT REPORTS
[1987] 2 S.C.R.
Thereafter, as a follow up of the recommendations of the Raj
Committee, in 1977 two sets of directions were issned by the Reserve·
Bank, called the Miscellaneous Non-Banking Companies (Reserve
Bank) Directions, 1977 and the Non-Banking Financial Companies
(Reserve Bank) Directions. 1977. Paragraph S of the Miscellaneous
Non-Banking Companies (Reserve Bank) Directions, 1977 which corresponded to paragraph 4 of the 1973 directions, however, made a
radical departure from the earlier provision. For the first time, a ceiling
was fixed on the period for which deposits conld be accepted. It was
provided that the period of a deposit could not be more than thirty-six
months. Paragraph 14 also vasted in the Reserve Bank the power to
grant exemption in suitable cases. Paragraph 5( 1) of the Miscellaneous
Non-Banking Financial Companies (Reserve Bank) Directions, 1977
dealt with period of deposits for hire-purchase finance, loan and investment companies and provided that the period of deposits shall not be
less than six months or more than thirty-six months. Paragraph 19
made the directions applicable to a loan company also applicable to
every company which was a "financial institution" hut not belonging to
D any of the categories of companies mentioned in paragraph 2(1) or
which was not a miscellaneous non-banking company within the meaning of the Miscellaneous Non-Banking Companies Directions, 1977.
Thereafter in 1978 the Prize Chits and Money Circulation
Schemes (Banning) Act 1978 was enacted "to ban the promotion or
E conduct of prize chits and money circulations schemes and for matters
connected therewith or incidental thereto. Section 2(a) defines
"Conventional Chits" on p,ractically the same lines as the type of business covered by the second part of paragraph 2 of the Miscellam!ous
Non-Banking Companies (Reserve Bank) Directions 1973 and the
Miscellaneotis Non-Banking Companies (Reserve Bank) Directions,
F
1977. Section 3, banned not merely promoting or conducting any prize
chit or money circulation but also on particip&tion in the Scheme of any
kind contravention of wbkh carried penal action. Section 11 exempts
from the operation of the Act prize chits or money circulation schemes
promoted by a State Government or any office or authority on its behalf, a company wholly owned by a State Government which does not
G carry on any business other than the conducting of a prize chit or money
circulation scheme, a banking institution notified by the Central
Government under Section S 1 of the Banking Regulation Act, the State
Bank of India or a subsidiary bank of tbe State Bank of India or a
corresponding new bank, a Regional Rural Bank, a eo-<>perative bank
and any charitable or educational institution notified in that behalf by
H the State Government in consultation with the Reserve Bank of India.
-4-· -
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R.B.I. v. PEERLESS GENERAL FINANCE
5
There is no general provision which empowers the Central Government A
or the Reserve Bank of India to exempt any other prize chit or money
circulation scheme from the applicability of the Act. In exercise of its
powers under Section 13 of the Act the Government of West Bengal has
made the Prize Chits and Money Circulation Scheme (Banning) (West
Bengal) Rules, 1979.
The Miscellaneous Non-Banking Companies (Reserve Bank)
Directions 1977 and the Non-Banking Financial Companies (Reserve
Bank) Directions came into force on July 1, 1977. On March 3, 1978 the
Reserve Bank informed the Peerless Company that under the Miscellaneous Non-Banking Companies Directions which applied to the
Company, the Company was prohibited from accepting deposits for
more than 36 months and since the deposits accepted by the Company
were for periods exceeding 36 months, the Reserve Bank wanted to
know what action the Company proposed to take to comply with the
requirement stipnlating the maximum period for which deposits might
be accepted. In reply, the Company, by its letter dated 31st March,
!978, pointed out the special features of the Company which persuaded
the Reserve Bank to grant exemption to the Company from the 1973
directions. The Company invited the attention of the Reserve Bank of
the various elements of the scheme which made it impracticable to
comply with the stipulation regarding the maximum period of 36
months as that would make the scheme wholly unviable. The Company
reqnested that further exemption may be granted in the public interest.
The alternative, it was said, would be to close the business and that
would mean loss of employment to several thousands of employees and
financial loss to millions of depositors. The Company suggested that the
Reserve Bank might recommend to the Central Government to convert
the undertaking into a joiet-sector enterprise. The letter ended with an
appeal to the Reserve Bank to grant exemption from the restrictions
relating to maximum period. By its letter dated July 23, 1979, the
Reserve Bank pointed out to the company that the schemes conducted
B
c
D
E
F
by the Company were covered by the provisions of the Prize Chits and
Money Circulation Schemes (Banning) Act, 1978 which had come into
force with effect from December 12, 1978. As the Company was banned G
from doing fresh business and was required to wind up its existing
business under the Act, there was no question of granting any exemption to the company. Nevertheless the Reserve Bank stated that they
had considered the claim for exemption on merits and found that it was
necessary to cancel the exemption already granted. The reasons for the
proposed cancellation were set out and the Company was asked to show
cause why the exemption should not be cancelled. On August 30, !979
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6
SUPREME COURT REPORTS
[!987] 2 S.C.R.
A
the Company replied at great length stating how necessary it was in the
public interest to grant exemption to the Company. On August 10,
1979, the Govermnent of West Bengal addressed a communication to
the Peerless Company pointin1~ out that the Prize Chits/Money Circulation Schemes conducted by the Company came within the purview of
the Prize Chits and Money Circulation Schemes (Banning) Act, 1978
B and, therefore, the Company was under an obligation to submit a winding up plan under Rule 4 of the Prize Chits and Money Circulation
Schemes (Banning) (West Bengal) Rules, 1979.
On September 3, 1979, 1the Company filed a writ petition in the
Calcutta High Court for a declaration that the Prize Chits and Money
c Circulation Schemes (Banning) Act, 1978 did not apply to the business
carried on by the company. A Rule was issued and an Interim Order
was made in favour of the com11any, first for a limited period and, later,
till the disposal of the writ petition. A similar writ petition was filed
questioning a notice issued by lthe Madhya Pradesh Government on the
same lines as that issued by th'e West Bengal Govermnent. A Rule and
D Interim Order were issued. During the pendency of the writ petition
exemption was refused by the Reserve Bank on 19.3.1980.
Appeals preferred by the company under the Letters Patent
against the judgment of the Si•1gle Judge were allowed. It was declared
that the business carried on by the company did not come within the
E mischief of the Prize Chits and Money Circulation Schemes (Banning)
Act, 1978. Against the judgme1ot of the Division Bench of the Calcutta
High Court the Reserve Bank of India, the Union of India and the State
of West Bengal have preferred Civil Appeal Nos.3562, 3563, 3564, 3565
and 4459 of 1986. In the cours~' of the judgment, the Division Bench of
the Calcutta High Court had observed that the company was a financial
F institution within the meaning of paragraph 11 of the Non-Banking
Financial Companies (Reserve Bank) Directions, 1977 and therefore,
the Directions contained therein applied to the business carried on hy
the company. Against this ohseirvation of the Division Bench, the Company has also preferred Civil AJllpeal Nos. 3566 and 3567 of 1986. After
the judgment of the Division llench of the Calcutta High Court, the
G Company, pursuant to the observations of the Division Bench that it
was a financial institution within the meaning of paragraph 11 of the
Non-Hanking Financial Compatnies Directions, applied afresh to the
Reserve llank of India for exemption from complying with the Directions. The Reserve Bank of India by its order dated August 22, 1986
refused to grant the exemption sought. The company has filed another
H writ petition in the Calcutta High Court against the said refusal by the
-..,-: '-
J.
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R.B.I. v. PEERLESS GENERAL FINANCE
7
1'
Reserve Bank to grant exemption. Therefore, the court preferred to A
apply "Non liquet" on the question whether the company is a financial
Institution within the meaning of para 11 of the Non-Banking Financial
Companies (Reserve Bank) Directions.
Dismissing the appeals of Reserve Bank of India. Union of India B
and the State of West Bangal, the Court.
~
HELD: Per Chinnappa Reddy, J.
~·t
I. I Legislatures resort to inclusive definitions (i) to enlarge the
meaning of words or phrases so as to take in the ordinary, popular and
natural sense of the words and also the sense which the statute wishes to c
attribute to it; (ii) to include meanings about which there might be some
~
dispute; or (iii) to bring under one nomenclature all transactions possessing certain similar features but going under different names. Dependiug on the context, in the process of enlarging, the definition may even
become exhaustive. By using the word, the Legislature did not intend to D
so expand the meaning of prize chit as to take in every scheme
involving subscribing and refunding of money. The word "includes",
the context shows, was intended not to expand the meaning of "prize
~
chit" but to cover all transactions or arrangements of the nature of
prize chits but under different names. The expression "Prize chit" had
nowhere been ~1atutorily defined before. The Bhahatosh Datta Study E
Group and the Raj Study Group had indentified the schemes popularly
-
called "Prize Chits". The Study Group also recognised that "Prize
Chits" were also variously called benefit/savings schemes and lucky
draws and that the basic common features of the schemes were the
.,.
giving of a prize and the ultimate refund of tbe amount of subscriptions
.\
(vide para 6.3 of the report of the Raj Study Group). It was recomF
mended that prize chits and the like by whatever name called should be
banned. Since prize chits were called differently, "prize chits" benefit/
savings schemes, "lucky draws", etc. it became necessary for the
Parliament to resort to an inclusive definitions so as to bring in all
transactions or arrangements containing those two elements. In defining the expression "prize chit" the Parliament did not intend to depart G
~
from the meaning which the expression had come to acquire in the
world of rmance, the meaning which the Datta and the Raj Study
Groups had given it. l42D-H; 43A-B]
1.2 Interpretation must depend on the text and the context. They
are the bases of interpretation. One may well say if the .text is the H
texture, context is what gives the colour. Neither can be ignored. Both
8
SUPREME COURT REPORTS
(1987] 2 S.C.R.
A are important. That inter1netation is best which makes the textual
interpretation match the contextnal. A statute is best ioterpreted when
the object and pnrpose of its enactment is known. With this knowledge,
the statute most be read, first as a whole and then section by section,
clause by clause, phrase by phrase and word by word. If a statute is
B
looked at, io the context of iits enactment, with the glasses of the statute
maker, provided by such context its scheme, the sections, clauses,
phrases and words may take colour and appear different than when the
statute is looked at without. the glasses provided by the context. With
these glasses the court must look at the Act as a whole and discover what
each section, each clause, each phrase and each word is meant and
designed to say as to ti:t ioto the scheme of the entire Act. No part of a
C
statute and no word of a statute can be construed io isolation. Statutes
have to be construed so that every word has a place and everything is in
its place. It is by looking at llhe def"mition as a whole in the setting of the
entire Act and by referene<e to what preceded the enactment and the
reasons for it that the courlt construed the expression "Prize Chit" io
Srinivasa. [43B-F]
D
1.3 Therefore, the two requirements mentioned io the two clauses
(i) and (ii) of the def"mition are not to be read disjnnctively; they are two
distioct attributes of "PriZE: Chits", each of which has to be satisfied.
The Conventional Chit satisfies both the requirements of the def"mition
of ''Prize Chit", since it involves both the "certain" and the "chance"
E
elements, the certaio element being the refund of the amount of subscriptions less the deductiomts and the chance element being the time of
such payment, dependent 011 the result of the draw or auction. Yet the
def"mition of "Prize Chit" expressly excludes the Conventional Chit
obviously for the reason that the "chance" element is overshadowed by
the "certain element". If so, no construction may be placed on the
F
def"mition so as to bring io •tll Recurring Deposit Schemes, even if they
do not involve a chance elen1ent. Snch a construction would reduce the
definition to a near absurdily and render tbe reference to the giving or
awarding of a prize or gift, a meaningless superfluity. If a conventional
chit is not a "Prize Chit" by definition there appears to be no logic io construing the definition to ioclnde a Recurring Deposit Scheme. [43H; 44A-D]
G
2. The argument that the two clauses (i) and (ii) are to be read
disjnnctinly and that they !ihould not be read as if they are joined by
the conjnnction "and" cannot be ace<epted. There is no need to iotroduce the word "or" either. How clauses (i) and (ii) ofs.2(e) have to be
read depends on the context. The context requires the definition to be
H read as if both clauses are satisfied. There is nothiog in the text which
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R.B.l. v. PEERLESS GENERAL FINANCE
9
makes it imperative that it be read otherwise. Each of the clauses (i) aod A
(ii) contains a number of alternatives and it is to those several alternatives that the expression "all or aoy of the following purposes" refers
and not to (i) or (ii) which are not alternatives at all. In fact, a prize
chit, by whatever name it may be called, does not contemplate the
exhaustion of the entire fund by the giving of prizes; it invariably pFOvides for a refund of the amount of subscription, less the deductions, to
B
all the subscribers or to those who have not won prizes, depending on
the nature of the scheme. Clauses (i) aod (ii) refer to the twin attributes
of a prize chit or like scheme aod not to two alternate attributes. [440-G I
2.2 While it is possible to say that Parliament desired to root out
prize chits and schemes of like nature involving the vicious' element of
gambling, it is inconceivable that Parliament intended to visit even
subscribers to Recurring Deposit Schemes involving no such vice with
such dire consequence. Therefore, section 2(e) of the Act does not contemplate a scheme without a prize, and therefore, the endowment
certificate scheme of the Peerless Company is outside the Prize Chits
aod Money Circulation Scheme (Banning) Act, 1978. [4SA-B; El
Srinivasa Enterprise v. Union of India, [ 1981] 1 SCR 801;
Ardeshir Bhiwandiwala v. State of Bombay, [ 196 l] 3 SCR 692; C.I. T.
Andhra Pradesh v. Taj Mahal Hotel, [1972] 1 SCR 168; and S.K.
Gupta v. K.P. Jain, [ 1979] 4 SCC 54, referred to.
3. Despite Articles 38, 39, 41 and 43 of the Constitution the Life
Insurance Corporation of India, ao instrnmentality of the State, which
is given the monopoly of Life Insuraoce business in the country has
taken no steps to offer proper security and protection to the needy,
poor, rural folk. If the Life Insuraoce Corporation is really interested
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E
in the treating the poorer policy-holders less harshly aod more liberally
F
the time has come for the Life Insurance Corporation to revise its terms
and conditions and to think in the direction of deleting the forfeiture
clause altogether as has now been done by the Peerless Company or fo
delete it at least from life policies for small amounts. Perhaps the Life
Insuraoce Corporation may think of short term, small amount policies
with no forfeiture clause and with some incentive such as a reduced
G
premium for continuing to pay premiums regularly. It is hoped, with
the management expertise at its command, the Life Insurance Corporation of India can devise a myriad ways of serving the poorer sections of
the people of our country, as also to tap the huge untapped Savings
resources, the existence of which has been brought home by companies
like the Peerless however wrong headed their business methods might
H
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10
SUPREME COURT REPORTS
[1987] 2 S.C.R.
be. It is a matter of common knowledge that the return to a policyholder who survives the period of the policy is very poor. It may be true
that the Life Insurance Corporation is paying higher bonus year after
year bot the bonus comes out of the amounts of the forfeited policies
and it means that it is really the poor class of policy holders whose
policies are forfeited that are paying bonus to the class of policy-holders
who are better off. This surely is not what is contemplated by Art. 38(2)
of the Constitution which taU<s of minimising the inequalities in income,
not only amongst individuals but also amongst groups of people and
Art. 39(c) which requires the State to secure that the operation of the
economic system does not ['esult in the concentration of wealth and
means of production to the common detriment. lt8F-H; 19A-D I
Per Khalid, J.
A close study of the dt!finition makes the conclusion inescapable
that the Peerless scheme does not come·within it. Any attempt to bring
the activities Of the Peerless within the definition has only to fail. It
D would not be proper to refer to the observations in the judgment, in
Srinivasa's case, on section 2(e) of the Act either as obiter or per
incurium. [HG]
When the activities of 1the Peerless and the Life lnsnrance Corporation are considered juxtaposed, one is tempted to observe that PeerE
less is less harsh than the Li.fe Insurance Corporation. The Life Insurance Corporation enjoys many privileges. It has a duty to be above
suspicion. It has a duty to serve people in the right manner. The Life
Insurance Corporation should at least in future be liberal and generous
when claims are made by those unfortunate few, who when robbed of
their bread earners claim for the insured amount and who are invariF ably met on technical pleas of concealment of ailment and the like. The
Life Insurance Corporation does not come out with glory when some of
its dealings are considered. lt2B-D]
G
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 3562
& 3563 of 1986 etc.
From the Judgment and order dated 23-5-86 of the Calcutta High
Court in F.M.A.T. No. 824 and 825/86
K. Parasaran, Attorney General, G. Rama Swamy, Additional
Solicitor General, S. ·Roy Chowdhary, Som Nath Chatterjee, S.N.
11 Kacker, A.K. Ganguli, Sankar Ghosh, N.N. Gooptu, T.K. Banner-
-
'
·-f-_
R.B.I. v. PEERLESS GENERAL FINANCE [KHALID, J.)
11
jee, A.K. Sil, H.S. Parihar, A. Mitra, G. Joshi, S. Roy, A. Subba A
Rao, P. Parmeshwaran, Bhaskar Gupta, P. Basu, A. Chatterjee, B.
Lehari, S. Sukumaran, Dilip Sinha, J.R. Das, K.R. Nambiar, H.K.
Puri, P.K. Pillai, S.K. Jain and J.R. Das for the appearing parties.
The Judgments of the Court were delivered:
following
KHALID, J. I agree with my learned brother in his conclusion.
However, I would like to add that short post-script of my own.
B
In the main Judgment the sinister aspects of the Peerless scheme
have been brought out in great detail as well as the improvements C
attempted. What disturbed me most was the plight of the innumerable
subscribers who lose their money by the operation of the scheme under
consideration. When I say this, I feel concerned of those situated far
and wide in the remote villages of the country, uninitiated into the
mysteries of financial schemes, who are lured by the promises of easy
money and decide to pay the first instalment by the encouraging words D
of the agents, who forget them thereafter, because of the disincentive
commission they get after the first instalment is paid, who, therefore,
do not pursue these depositors to make subsequent deposits promptly.
It is some consolation that the Peerless is trying.to bring in reforms to
reduce some of the vicious aspects of its scheme. While referring to the
plight of the depositors I do not at the same time ignore the large E
number of employees employed by the company.
The only reason why the appeals are being dismissed is on the
wording of Section 2(e) oUhe Act. A close study of the definition
makes the conclusion inescapable that the Peerless scheme does not
come within it. Any attempt to bring the activities of the Peerless F
within the definition has only to fail. This position gets support from
two Judgments rendered by benches of three Judges of this Court viz.,
Srinivasa Enterprises and others v. Union of India etc., [1981] 1 SCR
801 and State of West Bengal v. Swapan Kumar Guha., [1982] 1 SCC
561. Any attempt to distinguish the ratio of these two cases for the
purpose of these appeals cannot succeed. In the case of Srinivasa G
Enterprises this Court was considering the identical section. I do not
think it would be proper to refer to the observations in this Judgment
on this section either as obiter or per incurium. The position canvassed
before us thus strictly is not res-integra and is covered by these two
Judgments, more particularly in Srinivasa Enterprises.
Life Insurance Corporation is not a party before us. But its H
12
SUPREME COURT REPORTS
(1987] 2 S.C.R.
A
activities in certain spheres were broguht to our notice by the learned
l
counsel for the appellants. The Reserve Bank of India is the main
v
appellant. The Union of India and the State of West Bengal have in
tandem supported the Reserve Bank of India against the Peerless.
When the activities of the Peerless and the Life Insurance Corporation
are considered juxtaposed, one is tempted to observe that Peerless is
B less harsh than the Life Insurance Corporation. The Life Insurance
Corporation enjoys many privileges. It has a duty to be above sus-
~·
picion. It has a duty to serve people in the right manner. I am
'
constrained to observe from my experience, that I have found the Life
Insurance Corporation heartless whenever claims are made against it. +-
I fully agree with the observations made by my learned brother regardc ing some of the aspects of the Life Insurance Corporation schemes. I
wish only to emphasise that the L.l.C. should at least in future be
liberal and generous when claims are made by those unfortunate few,
r
who when robbed of their bread earners claim for the insured amount
and who are invariably met on technical pleas, of concealment of
ailment and the like. The Life Insurance Corporation does not come
D out with glory when some of its dealings are considered. I do not think
it would be proper to make more harsh reference about the Life Insuranee Corporation when it is not a party before us. I felt it necessary to
make these observations, with utmost restraint, since an opportunity
afforded itself in this case.
J...,
E
I share my brother's concern about the mushroom growth of
financial companies all over the country. Such companies have pm-
/'
liferated. 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 re-
-~
duced penniless because of the fraud played by such fiuancial vultures.
•
F It is necessary for the authorities to evolve fool-proof schemes to see
_A.
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.
CHINNAPPA REDDY J. The question is "Is a pri2e-less chit a
G prize chit?" So posed the answer appears to be self-evident. That is
what it is in the ultimate analysis.
---i....
'
The Peerless General Insurance & Investment Co. Ltd.' was
incorporated in 1932. After the nationalisation of the business of life
H
insurance the name of the company was changed to 'the Peerless
General Finance & Investments Co. Ltd.' For over a quarter of a
R.B.I. v. PEERLESS GENERAL FINANCE [KHALID, J.]
13
1
century now, the business of the company has been that of 'finance & A
investment'. Tue company offers three schemes, the principal of which
is the Endowment Certificate Scheme. Under this scheme, a subscriber is required to pay a fixed annual subscription for a fixed
number of years varying between the minimum of 10 years and the
maximum of 30 years. On the expiry of the period, the subscriber will
be paid by the company a sum of money called the Endowment Sum B
which is the face value of the Certificate. The subscriber is also entitled
. -1
to be paid a guaranteed fixed bonus. For example, an annual subscription of Rs. 77 for 10 years will fetch the subscriber at the end of the 10
.-:·t
year period a sum of Rs.1,000 as endowment sum and a sum of Rs.100
as bonus, making a total of Rs. l, 100. If any instalment, that is, any
amount of annual subscription is not paid within the stipulated period c
and period of grace, the Certificate lapses unless it has acquired a
i
surrender value. A Certificate acquires surrender value after the
expiry of three years from the date of commencement if the subscription for two full years has been paid. A Certificate which has not
acquired surrender value lapses on non-payment of instalments and
D
the amounts paid become forfeit to the company. A lapsed certificate
may, however, be revived at any time before the expiry date of maturity on payment of all dues together with interest at one paisa per rupee
-~
per month. There is also provision in the scheme for conversion of the
Certificate into a paid up Certificate, the paid up amount to be paid at
the end of the period, but without bonus. A person purchasing a
Certificate automatically becomes entitled to a free accident insurance
E
-
policy under a group insurance scheme.
A noticeable feature of the scheme is the remarkably low yield to
1
the subscriber on his investment. In the example that we gave we said a
subscriber investing Rs.77 every year for ten years will get, at the end
F
of the tenth year, a return of Rs.1000 by way of 'Endowment Sum' and
Rs.100 as bonus. Treating the total sum of Rs. l, 100 as the amount
which the investor gets back on his ten-year annual investment of
Rs. 77, the yield on his investment works out at compound interest of
about 6% or simple interest of a little over 7%. This is on the assumption that he does not commit default but pays his annual subscription
G
regularly. But consider what happens to the investments of those who
--\
commit default; a subscriber who defaults in payment of annual subscription after payment of the first subscription, forfeits the subscription previously paid by him. A subscriber who pays the first two subscriptions but commits default thereafter is entitled to have a refund of
the subscriptions paid by him but only at the end of the full endowment
H
period. That is to say, the amount invested by the subscriber upto the
14
SUPREME COURT REPORTS
[1987] 2 S.C.R.
A time of default will be with the company, earning intetest for the
company but nothing for the subscriber himself. The subscriber who
commits default after paymeint of two annual subscriptions is entitled
to have the surrender value paid to him after the expiry of three years
from the date of rommencement. The surrender value is 90% of the
B
c
D
subscriptions paid by him excluding the first year's subscription. In
other words, if a subscriber who commits default after payment of two
subscriptions opts for immediiate payment after three years he forfeits
his first year's subscription and 10% of the subsequent years' subscrip- .
tion. On the other hand, if he opts for payment at the end of endowment period he will get a refund of the subscriptions paid by him but
without interest and without bonus. If he commits default after paying
three years' subscription but opts for payment at the end of the
Endowment period he will get back a proportionate part of the
Endowment Amount and this without bonus. The yield will be very
much lower than the 6% compound interest or 7% simple interest that
we mentioned earlier. The subscriber is always at the losing end. It is a
perfect case of 'Heads I win, tails you lose'.
At this stage, it may be useful to refer to the business practices and
the working results of the company. The company advertises its schemes
widely in beguiling terms. The public are told, "The schemes are open
to any person of Indian Nationality without any restriction of caste,
creed, sex, age or health, excepting physical disabilities, such as, loss
E of limbs, dumbness, deafness, or blindness". They are further told,
"Investment under the Schemes is highly profitable and the retU"' is
sure and guaranteed by the Company. There is no element of uncertainty in the matter"; "the te1ms and conditions of the Certificate are
simple, liberal and attractive"; "No trouble of Medical Examination";
"Unique advantage of saving as well as earning decent profit" etc. A
F
virtual publicity blitz is carried on in the daily and weekly newspapers:
~·'Peerlesswan epitome of absolute security", "Save for your dear
ones", "Savings through Peerless means savings for the progress of the
Nation", "Peerless team works today for India's happy tomorrow",
"Save through peerless for national welfare", "Peerless the choice of
the millions" etc.
G
The message of Peerless is made to penetrate the rural areas to
tap the small savings of the poor ignorant villagers through a special
structure o:f agents, special agents, sub-organizers, organizers, special
organizers and so on. This field staff appears to be chosen for their
social, political or official connections. What is of significance is that
H an agent's commission is 30% of the first year's subscription and 5%
R.B.I. v. PEERLESS GENERAL FINANCE (KHALID, J.]
15
only of subsequent years' subscriptions. Straightaway, this offers an A
1
incentive to the agents to concentrate on securing fresh business and a
disincentive to collect subscriptions of subsequent years. It is common
experience and common knowledge that most rural folk particularly
those belonging to the poorer sections of people will not pay their
subscription regularly unless somebody takes the trouble of collecting
their subscriptions from them showing the same enthusiasm in doing so B
as was shown in enrolling subscribers and collecting the first subscrip-
. -1
tion. The incentive of 30% of the collection of the subscription of the
first year automatically operates as a disincentive for collecting sub-
~t·
scriptions of subsequent years. The results show it and perhaps it is
intended to be so. As we have already seen, default after the payment
'
of the first subscription results in forfeiture of the first year's subscrip- c
tion. The first subscription is literally shared between the company and
.
its agents and one need not wonder that under the method of
\
accountancy adopted by the Company it is treated as income and not
as a liability of the company. We are told that the company has
adopted the 'actuarial' system of accountancy followed by the Life
Insurance Corporation. Though we note here that the business of the D
Life Insurance Corporation is insurance business and therefore different from the business of the company, we will have more to say about
the policies of the Life Insurance Corporation a little later.