Bhavesh
D. Parish & Ors Vs. Union of India & ANR [2000] INSC 337 (12 May 2000)
M.B.Shah,
B.N.Kirpal KIRPAL,J.
The
appellants who carry on the business of shroffs are impugning the validity of
Section 9 of the Reserve Bank of India Act as amended by the Amendment Act,
1997 (hereinafter referred to as the Act) on the ground that the said provision
is violative of Articles 14 and 19(1)(g) of the Constitution of India.
The
trade of business of shroffs in India has been in existence for a long time. This trade is carried on not
only in cities but also in small towns and villages in parts of India.
The
appellants are shroffs engaged in the business of providing credit to the
members of the public. The traditional mode of organising the business of shroffs
over the past several decades had been by way of partnership firms. The nature
of the services practised by the appellants generally involved maintaining a
mutual current account where the customer may either place deposit on call or
withdraw money on call, without security. The financing activity of the shroff
firms was through capital contributions of the partners/proprietor and deposits
made by members of the public. Some of the other activities of the shroffs
include cheque discounting, the issuance of hundis, the collection of cheques
from different centres and providing other similar facilities to customers. The
services extended by the appellants are availed of by small and medium sized
traders, professionals, salaried workers, agriculturists and individuals.
The
Reserve Bank of India (hereinafter referred to as the
RBI) is a statutory corporation constituted as the Central Banking Authority
for the country by the Reserve Bank of India Act, 1934. The RBI is constituted,
inter alia, to regulate the issue of bank notes and keeping of reserves with a
view to securing monetary stability in India and generally to operate the
currency and credit system of the country to its advantage. The RBI is also
vested with various powers to regulate the currency and credit system of the
country. The powers so vested in RBI include the power to issue directions to
non-banking institutions receiving deposits and to financial institutions. By
amendment in 1963 a new Chapter III-B was inserted in the said Act. This
chapter inserted Sections 45-H to 45-Q which were provisions relating to
non-banking institutions receiving deposits and financial institutions. In the
Statement of Objects and Reasons it was provided that the existing enactments
relating to banks did not provide for any control over companies or
institutions, which, although were not treated as banks, accept deposits from
the general public or carry on other business which was allied to banking. For
ensuring more effective supervision and management of the monetary and credit
system by the RBI, it was observed that the RBI should be enabled to regulate
the conditions on which deposits may be accepted by these non- banking
companies or institutions. The provisions of the said chapter III-B did not
apply to individuals or firms like the appellants who are not incorporated but
still do business which is akin to that of banking.
In
order to place some restrictions on the acceptance of deposits by
unincorporated bodies, by the Banking Laws (Amendment) Act, 1983 (Act 1 of
1984), Chapter III-C and Section 58-B(5A) were inserted into the Act. The
relevant portion of principal restrictions in Chapter III-C which were
contained in Section 45-S, read as under: Deposits not to be accepted in
certain cases. 1) No person being an individual or a firm or an unincorporated
association of individuals shall at any time, have deposits from more than the
number of deposits specified against each, in the table below:
TABLE
(i) Individual Not more than twenty-five depositors excluding depositors who
are rel ativ es of the individual.
ii)
Firm Not more than twenty-five depositors per partner and not more than two
hundred and fifty depositors in all, excluding, in either case, depositors who
are relatives of any of the partners.
iii)
Unincorporated Association of individuals. Not more than twenty five depositors
per individual and not more than two hundred and fifty depositors in all,
excluding, in either case, depositors who are relatives of any of the
individuals constituting the association.
2. Where
at the commencement of Section 10 of the Banking Laws (Amendment) Act, 1983,
the deposits held by any such person are not in accordance with sub-section
(1), he shall, before the expiry of a period of two years from the date of such
commencement, repay such of the deposits as are necessary for bringing the
number of deposits within the relative limits specified in that sub-section.
The
constitutional validity of Section 45-S of the Act was upheld by the Delhi High
Court in Kanta Mehta VS. Union of India and others 1987 (62) Company Cases 769.
The main challenge was on the ground that it infringed the appellants right
under Article 19(1)(g) of the Constitution of India and was violative of
Articles 14 & 19 of the Constitution. While upholding the validity of
Section 45-S, the High Court noted that expert reports by study groups had
recommended that it would not be in the interest of all, especially the
depositors, if unincorporated bodies such as partnerships were to work as
companies without any control or supervision of the RBI. This decision of the
High Court was affirmed by this Court in T. Velayudhan Achari and While
upholding the validity of Section 45-S, this Court at page 591 observed as
follows:
No
doubt, the impugned legislation places restrictions on the right of the
appellants to carry on business, but what is essential is to safeguard the
rights of various depositors and to see that they are not preyed upon. From the
earlier narration, it would be clear that the Reserve Bank of India, right from 1966, has been
monitoring and following the functioning of non-banking financial institutions
which invite deposits and then utilise those deposits either for trade or for
other various industries.
A
ceiling for acceptance of deposits and to require maintenance of certain
liquidity of funds as well as not to exceed borrowings beyond a particular
percentage of the net-owned funds have been provided in the corporate sector.
But
for these requirements, the depositors would be left high and dry without any
remedy.
It
appears that Section 45-S of the Act, as originally incorporated, did not have
the desired effect. The non-corporate sector was virtually free from all
disciplines even though its activities were same or similar to the corporate
sector, the difference only being in the magnitude and that too only in some
cases. According to the respondents it was to rectify this imbalance that first
an ordinance was issued which sought to completely prohibit any receipt of
deposits by unincorporated associations in the non- corporate sector. When
certain hardships were pointed out by those who did not carry on the business
comparable to the companies which were under Chapter III-B i.e. who did not
borrow money or receive advances to carry on business in the financial sector
but borrow money for their own trade or manufacture, the Act, which replaced
the ordinance, watered down the rigour to some extent.
The
newly incorporated Section 45-S, which is impugned in this writ petition, is as
follows:
45-S
(1) No person, being an individual or a firm or an unincorporated association
of individuals shall, accept any deposit:
(i) If
his or its business wholly or partly includes any of the activities specified
in clause © of Section 45-I;
or
(ii) If his or its principal business is that of receiving of deposits under
any scheme or arrangement or in any other manner, or lending in any manner.
Provided
that nothing contained in this sub-section shall apply to the receipt of money
by an individual by way of loan from any of his relatives.
(2)
Where any person referred to in sub-section (1) other than a body corporate
holds any deposit on the Ist day of April, 1997 which is not in accordance with
sub- section (1), such deposit shall be repaid by that person immediately after
such deposit becomes due for repayment or within two years from the date of
such commencement, whichever is earlier.
(3) On
and from the date of Ist day of April, 1997, no person referred to in
sub-section (1) shall issue or cause to be issued any advertisement in any form
for soliciting deposit.
Explanation
For the purpose of this section:
(a) A
person shall be deemed to be a relative of another if, and only if :
(i)
they are members of a Hindu undivided family; or (ii) they are husband and
wife; or (iii) the one is related to the other in the manner indicated in the
list of relatives below:- List of relatives
1.
Father 2. Mother (including step-mother) 3. Son (including step-son), 4. Sons
wife, 5. Daughter (including step-daughter), 6. Fathers father, 7. Fathers mother,
8. Mothers mother, 9. Mothers father, 10. Sons son, 11. Sons sons wife, 12. Sons
daughter, 13. Sons daughters husband, 14. Daughters husband, 15. Daughters son,
16. Daughters sons wife 17 Daughters daughter 18.
Daughters
daughters husband 19. Brother (including step- brother), 20. Brothers wife, 21
Sister (including step-sister), 22. Sisters husband.
The
principal features of the amended Section 45-S in so far as they relate to the
appellants are:
(a)
From 1.4.1997, no individual or firm may accept any deposit: (i) if his or its
business wholly or partly includes financing activities, whether by way of
making loans or advances or otherwise; or (ii) If his or its principal business
is that of receiving deposits under any scheme or arrangement or lending in any
manner. (b) The prohibition on the acceptance of deposits does not apply to
loans from relatives. (c) A company may continue to accept deposits for
financing activities or lending subject to the regulations in respect of
Non-Banking Financial Companies.
(d)
Individuals and firms holding deposits on 1.4.1997 must repay such deposits
immediately after such deposits become due for repayment or within two years
(before 31.3.1999), whichever is earlier. (e) On and from 1.4.1997 no
individual or firm may issue advertisement in any form for soliciting deposits.
(f) All non-banking financial companies must have a minimum of Rs. 25,00,000 of
net owned funds (NOF) and withdraw the deposits and/or take loans before the
agricultural operations commence. The agriculturists and small traders who earn
valuable interest on net deposits will no longer be able to do so.
The
impugned Section 45-S does not in any way prohibit or restrict any
unincorporated body or individual from carrying on the business that it likes. It
is open to unincorporated bodies to carry on their financial business either
from their own funds or the funds borrowed from their relatives or from
financial institutions. The restriction, which is placed by Section 45-S, is on
the carrying on of such business by utilising public deposits.
The
grievance of the appellants is that the firms of or individual shroffs, as a
result of amendment to Section 45-S, will not be allowed to accept any deposit
from the public for the purposes of their business activities. There is a
complete prohibition on sharafi transactions (mutual current account
transactions) which had formed the bedrock of the financing activities of the shroffs.
This is because individuals and firms will no longer be entitled to accept
deposits on current account and the minimum period for which a non-banking
financial company may accept deposit is now one year. The shroffs will now be
compelled to convert from partnership firms into limited companies.
Challenging
the virus of Section 45-S, it was submitted by the learned counsel for the
appellants that shroffs provided the facility of deposit and loan transactions
24 hours a day and this facility was traditionally extended to customers like
agriculturists, such as cotton farmers, tobacco farmers, vegetable producers
etc. who had a seasonal need for finance and a periodic surplus of investible
funds. The flexibility of deposit and withdrawal of the funds available to this
sector which was provided by the shroff community will now cease. It was submitted
that the impugned provisions are violative of the appellants right to carry on
their trade and business guaranteed under Article 19(1)(g) of the Constitution.
Elaborating
this contention it was urged that though it is open to the Government to impose
reasonable restriction in the public interest under Article 19(6) of the
Constitution but impugned provisions neither met the test of reasonableness nor
public interest . It was also submitted that the impugned provisions were violative
of Article 14 of the Constitution being artbitrary, discriminatory and
un-reasonable.
This
Court in Papnasam Labour Union VS. Madura Coats limited and another (1995) 1
SCC 501 while considering challenge to Section 25-M of the Industrial Disputes
Act, 1947 of being violative of Article 19 of the Constitution referred to
earlier decisions of this Court and at page 511 set out the following
principles and guidelines which should be kept in mind for considering the
constitutionality of statutory provision upon a challenge on the alleged vice
of unreasonableness of the restriction imposed by it:
a) The
restriction sought be imposed on the Fundamental Rights guaranteed by Article
19 of the Constitution must not be arbitrary or of an excessive nature so as to
go beyond the requirement of felt need of the society and object sought to be
achieved.
b)
There must be a direct and proximate nexus or a reasonable connection between
the restriction imposed and the object sought to be achieved.
c) No
abstract or fixed principle can be laid down which may have universal
application in all cases. Such consideration on the question of quality of
reasonableness, therefore, is expected to vary from case to case.
d) In
interpreting constitutional provisions, courts should be alive to the felt need
of the society and complex issues facing the people which the Legislature
intends to solve through effective legislation.
e) In
appreciating such problems and felt need of the society the judicial approach
must necessarily be dynamic, pragmatic and elastic.
f) It
is imperative that for consideration of reasonableness of restriction imposed
by a statute, the Court should examine whether the social control as envisaged
in Article 19 is being effectuated by the restriction imposed on the
Fundamental Rights.
g)
Although Article 19 guarantees all the seven freedoms to the citizen, such
guarantee does not confer any absolute or unconditional right but is subject to
reasonable restriction, which the Legislature may impose in public interest. It
is therefore necessary to examine whether such restriction is meant to protect
social welfare satisfying the need of prevailing social values.
h) The
reasonableness has got to be tested both from the procedural and substantive
aspects. It should not be bound by processual perniciousness or jurisprudence
of remedies.
j)
Restriction imposed on the Fundamental Rights guaranteed under Article 19 of
the Constitution must not be arbitrary, unbridled, uncanalised and excessive
and also not unreasonably discriminatory. Ex hypothesi, therefore, a
restriction to be reasonable must also be consistent with Article 14 of the
Constitution.
k) In
judging the reasonableness of the restriction imposed by clause (6) of Article
19, the Court has to bear in mind Directive Principles of State Policy.
l)
Ordinarily, any restriction so imposed, which has the effect of promoting or
effectuating a directive principle, can be presumed to be a reasonable
restriction in public interest.
Keeping
the aforesaid principles in mind let us now examine the reasons for enacting
Section 45-S.
In the
affidavit filed by the respondent it has been, inter alia, stated that the
growing volume of deposits with unorganised financial sector affected the
operation of monetary and credit policy to the extent that it involved a loss
of control by the central monetary authority on the use of these funds.
Further, the unincorporated bodies were susceptible to default as the costs of
funds and returns could not be matched in a viable way leading to adverse
selection i.e. the funds being directed to risky illiquid investments. Whereas
incorporated bodies were subject to regulatory controls, it was impossible to
regulate unincorporated bodies at all. It is also stated in the affidavit that
over the years, the functioning of various unincorporated bodies was under
observation and in 1984 when Chapter III-C was added to the Act, the
prohibition to accept deposits was partial in the sense that unincorporated
bodies were allowed to accept deposits from a limited number of depositors with
no ceiling on the amount of deposit. The working of the provisions of Chapter
III-C did not result in healthy development but there was a proliferation of
such unincorporated bodies engaged in financial intermediation.
As
pointed out in para-3 of the Statement of Objects and Reasons the existing
provisions were flouted by unscrupulous entities by floating different
partnership firms when a firm reached the level of 250 depositors. This
multiplication of firms took place with a view to circumvent the rigour of the
law.
It
appears that after the introduction of Section 45-S in 1984, several complaints
were received by the RBI from various parts of the country regarding rampant
mal-practices being adopted by several persons/firms especially in the State of
Kerala. Sample studies, which were conducted, revealed several astonishing
features and the menace of such unincorporated associations accepting public
deposits and the mushroom growth of such intermediaries. These business firms
were commonly known in Kerala as blade companies so called because of their
usurious lending rates. The study showed that these blade companies drew
sustenance from human greed. These blade companies were offering interest of
36% and in turn were charging excessive interest from the borrowers. By the
time the study was conducted, it showed that the private financing scenario in Kerala
pointed out to near desolation. Where as in 1987 the daily newspapers and
periodicals were filled with flashy advertisements for attracting business subsequently
most of the firms had dis-appeared. Public confidence had been shattered beyond
description and the fate of several depositors stood sealed with the tragedy
which had over- taken on them having lost their hard earned money. Similarly
complaints were also received by the RBI of individuals/firms and
unincorporated bodies accepting deposits in Tamil Nadu. The report received
from that State recommended that the RBI should over-see the functioning of
such financial firms and it ought to consider banning the activities in public
interest.
It is
the case of the RBI that the flexibility, convenience and facilities etc.
provided by the appellants were turning out to be mirages for the gullible
public who ultimately had to bear the burnt of the callous ways in which the
unincorporated bodies extended credit under the guise of flexibility and
convenience. Unquestionably high interest rates were charged by such firms from
the borrowers, but when the time came for the return of money borrowed by such
firms, a number of such firms had folded up resulting in great loss to the
depositors. The RBI, being a statutory expert body entrusted with monetary
management, came to the conclusion that these unincorporated bodies which were
functioning as financial intermediaries in an informal and unorganised manner
be restrained from having access to deposits from public. The spread of formal
financial agencies such as, commercial banks, regional rural banks, cooperative
banks, development financial institutions and non-banking financial companies
etc. had taken care of the need to mobilise the domestic savings of the nation
and to deploy the same in a proper manner.
As
regards availability of banking facilities in small towns and villages is
concerned, the number of rural branches of commercial banks, which were 1833 in
June, 1969, increased to 33069 as on June, 1996. The average population per
branch has increased manifold. The regional rural banks had been established in
1975 with a view to serve the people. Several State Governments had promoted
cooperative banking culture amongst the rural masses for effectively taping the
resources so as to meet their credit requirements. It appears that the
institutional finance is available far more easily now than before. With these
facilities now being available and in view of the inherent risks to the general
public at the hands of the unincorporated bodies engaged in financial
activities and accepting public deposits, we agree that the restrictions now
imposed by the amended Section 45-S cannot be considered as being
un-reasonable.
As has
already been observed, there is no total prohibition or ban from accepting
deposits by incorporated bodies. It is only such incorporated bodies as are
carrying on business referred to in Clauses I and II of sub-section (1) of
Section 45-S of the Act which cannot accept deposits from the public. They can
however receive loans from relatives. The appellants cannot claim a fundamental
right to carry on the business of financing with other peoples money. In other
words, there can be no unrestricted fundamental right to accept deposits from
the public. This Honble Court has observed in Peerless General Finance and
India and others [ 1992(2) SCC 343] that there is no fundamental right to do
any unregulated business with subscribers/depositors money. This Honble Court
in that case upheld the directions issued by RBI requiring residuary
non-banking companies to invest the amount collected by them as deposits in a
particular way. This Honble Court further held that such companies should
invest their own working capital and find such resources elsewhere with which
the Reserve Bank has no concern. Since the deposit acceptance by unincorporated
bodies is incapable of being regulated by virtue of the large number of such
bodies, the provisions in the nature of the amended Section 45-S are necessary
and unincorporated bodies should do their business with their own money or
institutional finance or money borrowed from relatives.
The
amended Section 45-S further expands the provisions of Chapter III-B by making
it necessary for all those, who mobilize public funds for deployment in the
financial sector, to follow the norms of prudential management which is the
internationally accepted practice in relation to those handling public funds.
In view of Chapter IIIB, particularly in its revised form after the amendment,
it would have been highly incongruous to permit people to side step the
discipline of Chapter IIIB by refusing to incorproate themselves. In view of
this anomaly which has come about it was decided by the legislature not to
permit such activities in the non- corporate sector. Nothing prevented the
appellants who alleged to be the partners of different firms from incorporating
themselves as a company.
The
real grievance was that the appellants did not want to comply with the norms of
prudential management and, therefore, sought to paint a picture as though their
trade had been prohibited. There was no impediment in the trade as long as it
was carried on within the norms of Chapter IIIB. In fact, they would have
greater latitude to do trade as a corporate body, in that the present
restriction on the amount of money to be deposited would stand increased. In
this context, it may be emphasised that there is absolutely no restriction on
any person to utilise his own funds (including the funds received from his
relatives) for any purpose he likes including para banking or financial
activity.
Historically,
only banks have been allowed to accept deposits repayable on demand because
they were subjected to maintenance of cash reserve requirement which would
enable them to meet liabilities as and when they are called upon or when any
demand is made for repayment. Since non-banking financial companies were not
subjected to such cash reserve requirement, it was not desirable to allow
non-banking financial companies to accept demand deposits. In any case, such
bodies were nothing but para banking institutions and either they had to be
regulated on the lines of the financial institutions and if that was not
feasible, they should have appropriately been prohibited from accepting
deposits from public. After all, the right to raise public deposit could not be
construed as a fundamental right. The restrictions imposed cannot be considered
unreasonable or arbitrary.
The
RBI has not acted hastily. Before amending Section 45-S of the Act in 1997, it
had the benefit of having with it the reports of number of committees, all of
whom had recommended that the unincorporated business firms/individuals be
brought under certain discipline and, if possible, non-banking financial
business was not to be permitted to be carried on by the unincorporated bodies.
It will be useful in this regard to refer to the report of the study group on
non-banking financial intermediaries appointed by the Banking Commission in
1971. The study group after making a detailed study of the then existing
non-banking financial intermediaries stated in respect of unincorporated bodies
in para 8.25 of its report as under:
8.25
We, therefore, suggest that the Reserve Banks control may be extended to
finance corporations and necessary enabling legislation be passed to that
effect. We recognise that the administrative task of watching and regulating
the operations of a large number of small firms will be difficult. We,
therefore, suggest that if the law permits, only companies may be allowed to do
the banking business in the sense of accepting deposits from the public for the
purpose of lending or investment. IN that case, the Banking Regulation Act
would govern the operations of the Bangalore type finance corporations. If,
however, the law does not permit it, any scheme of regulation may have as one
of its objections the reduction in the number of finance corporations besides,
of course, the safeguarding of depositors interest.
It was
further submitted that the amendments were introduced after taking into account
the recommendations of successive committees, appointed by the Bank and
Government of India, which had studied the functioning of these bodies.
The
question of restricting such financial activity by unincorporated bodies, is a
question of economic policy as it involves regulation of economic activities by
different constituents. In such matters of economic policy, this Honble Court
does not interfere with the decision of the expert bodies which have examined
the matter. The following Union of India, 1982 (1) SCR 947 at 969 are
appropriate:
Another
rule of equal importance is that laws relating to economic activities should be
viewed with greater latitude than laws touching civil rights such as freedom of
speech, religion etc. It has been said by no less a person than Holmes,J. that
the legislature should be allowed some play in the joints, because it has to
deal with complex problems which do not admit of solution through any
doctrinaire or straight jacket formula and this is particularly true in case of
legislation dealing with economic matters, where, having regard to the nature
of the problems required to be dealt with, greater play in the joints has to be
allowed to the legislature. The court should feel more inclined to give
judicial deference to legislature judgment in the field of economic regulation
than in other areas where fundamental human rights are involved. Nowhere has this
admonition been more felicitously expressed than in Morey V. Dond (354 US 457)
where Frankfurther J. said in his inimitable style:
In the
utilities, tax and economic regulation cases, there are good reasons for
judicial self-restraint if not judicial deference to legislative judgment. The
legislature after all has the affirmative responsibility. The courts have only
the power to destroy, not to reconstruct. When these are added to the
complexity of economic regulation, the uncertainty, the liability to error, the
bewildering conflict of the experts, and the number of times the judges have
been overruled by events self limitation can be seen to be the path to judicial
wisdom and institutional prestige and stability.
The
court must always remember that legislation is directed to practical problems,
that the economic mechanism is highly sensitive and complex, that many problems
are singular and contingent, that laws are not abstract propositions and do not
relate to obstract units and are not to be measured by abstract symmetry that
exact wisdom and nice adaptation of remedy are not always possible and that judgement
is largely a prophecy based on meager and uninterrupted experience. Every
legislation particularly in economic matters is essentially empiric and it is
based on experimentation or what one may call trial and error method and
therefore it cannot provide for all possible situations or anticipate all
possible abuses. There may be crudities and inequities in complicated
experimental economic legislation but on that account alone it cannot be struck
down as invalid.
At
page 988 it is further held:
That
would depend upon diverse fiscal and economic considerations based on practical
necessity and administrative expediency and would also involve a certain amount
of experimentation on which the court would be last fitted to pronounce. The
court would not have the necessary competence and expertise to adjudicate upon
such an economic issue. The court cannot possibly assess or evaluate what would
be the impact of a particular immunity or exemption and whether it would sere
the purpose in view or not.
Even
if these restrictions incorporated in the Act amount to a total prohibition,
such action was necessary in the public interest as the mushroom growth of
unincorporated bodies accepting deposits had gone beyond control calling for
restriction of the nature imposed by the amended Section General Finance and
Investment Co. Ltd. and others (1987) 61 Company Cases 663, this Honble Court
took judicial notice of and expressed concern about the mushroom growth of such
bodies by referring to the advertisements issued by various such bodies in the
press. While upholding the constitutional validity of the Prize Chits and Money
Circulation Schemes (Banning) Act, 1978 (Srinivasa Honble Court pointed out
that for saving the poor and unwary public from the unscrupulous racketeers who
glamourise and prey upon the gambling instinct to get rich through prizes,
banning was necessary. The court observed how can you save moth from the fire
except by putting out the fatal fire ? On the same analogy for safeguarding or
protecting the public from the loss which was likely to be caused to them by
the failure of unincorporated bodies promising high returns, it was necessary
to prohibit unincorporated bodies from accepting deposits from the public.
Further, as observed by this Court in Srinivas Enterprises case (supra) it is a
constitutional truism that restrictions in extreme cases should be pushed to
the point of prohibition, if any lesser strategy will not achieve the purpose.
It
cannot be denied that shroffs have played an important roll in providing
finance in the rural sector and in small towns. But, despite the services which
they may have rendered, it is difficult to accept the contention that the RBI
was not justified in imposing ban on unincorporated bodies accepting deposits
from public while carrying on financing business. The inherent danger to the
public specially in small towns and villages in permitting such business to be
carried on un-checked and un-regulatory was ample justification for the
impugned legislation, keeping in mind the experience of the public which had
been dealing with such unincorporated bodies in Kerala and Tamil Nadu.
It is
open to the appellants to organise their business within the permissible legal
set up by forming non- banking financial corporations and functioning in
accordance with Chapter III-B of the Act and the directives issued by the Bank
from time to time. The prohibition on partnership firms to carry on their
business like that of shroffs cannot be regarded as being an unreasonable
restriction on the fundamental right of the appellants to carry on their trade.
They
can continue lending money as long as they do not borrow from the public.
The
services rendered by certain informal sectors of the Indian economy could not
be belittled. However, in the path of economic progress, if the informal system
was sought to be replaced by a more organised system, capable of better
regulation and discipline, then this was an economic philosophy reflected by
the legislation in question. Such a philosophy might have its merits and
demerits. But these were matters of economic policy. They are best left to the
wisdom of the legislature and in policy matters the accepted principle is that
the courts should not interfere. Moreover in the context of the changed
economic scenario the expertise of people dealing with the subject should not
be lightly interfered with. The consequences of such interdiction can have
large-scale ramifications and can put the clock back for a number of years. The
process of rationalisation of the infirmities in the economy can be put in
serious jeopardy and, therefore, it is necessary that while dealing with
economic legislations, this Court, while not jettisoning its jurisdiction to
curb arbitrary action or unconstitutional legislation, should interfere only in
those few cases where the view reflected in the legislation is not possible to
be taken at all.
Examining
the validity of the amended Section 45-S of the Act by applying the principles
enunciated over the years by this Court, and as encapsuled in the passage
quoted in the earlier part of this judgment from this Courts decision in Papnasan
Labour Unions Case (supra) we find that the said Section is in no way illegal
or bad in law. Section 45-S no doubt prohibits the conduct of banking business
by an unincorporated non-banking entity like a shroff, but this prohibition has
come about, inter alia, in the interest of unwary depositors and borrowers
(from shroffs) and with a view to prevent them from committing financial
suicide.
Earlier
attempts to adequately regulate the non-banking institutions not having
achieved the desired result of protecting large number of depositors from
unincorporated financial institutions which would suddenly mushroom overnight
and then vanish without a trace, but taking with it depositors money, left the
RBI with no alternative but to prohibit such unincorporated entities from
conducting financial business which was more than akin to banking.
The
restrictions imposed against acceptance of deposits by unincorporated bodies
carrying on financial activity or the business of deposit acceptance or lending
in any manner are in the larger interest of general public vis a vis few
persons accepting such deposits. The need for such restrictions had become
acute and imperative in view of large scale mis-management of public funds by
such unincorporated bodies.
Accordingly,
we hold that the provisions of Section 45-S of the Act are valid.
Before
we conclude there is another matter to which we must advert to. It has been
brought to our notice that Section 45- S of the Act has been challenged in
various High Courts and few of them have granted the stay of provisions of
Section 45-S. When considering an application for staying the operation of a
piece of legislation, and that too pertaining to economic reform or change then
the courts must bear in mind that unless the provision is manifestly unjust or
glaringly unconstitutional, the courts must show judicial restrain in staying
the applicability of the same.
Merely
because a statute comes up for examination and some arguable point is raised,
which persuades the courts to consider the controversy, the legislative will
should not normally be put under suspension pending such consideration.
It is
now well- settled that there is always a presumption in favour of the
constitutional validity of any legislation, unless the same is set- aside after
final hearing and, therefore, the tendency to grant stay of legislation
relating to economic reform, at the interim stage, cannot be understood. The
system of checks and balances has to be utilised in a balanced manner with the
primary objective of accelerating economic growth rather than suspending its
growth by doubting its constitutional efficacy at the threshold itself.
While
the courts should not abrogate its duty of granting interim injunctions where
necessary, equally important is the need to ensure that the judicial discretion
does not abrogate from the function of weighing the overwhelming public
interest in favour of the continuing operation of a fiscal statute or a piece
of economic reform legislation, till on a mature consideration at the final
hearing, it is found to be unconstitutional. It is, therefore, necessary to
sound a word of caution against intervening at the interlocutory stage in
matters of economic reforms and fiscal statutes.
A
number of petitions had been filed in this Court seeking transfer of writ
petitions pending in different High Courts. By order dated 17.2.2000, those
Transfer Petitions were dismissed as not pressed. Besides the writ petitions,
in respect of which, those transfer petitions had been filed, a number of other
petitions are pending disposal in various High Courts. In quite a few of them
the High Courts have granted an interim injunction staying the operation of the
implementation of the amended Section 45-S of the Act.
For
the view we have taken now, it is imperative that these petitions, pending in
the different High Courts, are formally disposed off at an early date. We,
therefore, request all the High Courts, in which the petitions are pending
challenging the provisions of Section 45-S, to dispose them of within a period
of three months. Needless to say inasmuch as the validity of Section 45-S has
been upheld by us, the said provision shall be liable to be enforced
notwithstanding any interim orders to the contrary which may have been passed
by any High Court, which interim order must necessarily now loose all its
significance.
For
the aforesaid reasons, this writ petition is dismissed. The respondents will be
entitled to costs.
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