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PETITIONER:

BHAVESH D. PARISH & OTHERS

Vs.

RESPONDENT:

UNION OF INDIA AND ANOTHER

DATE OF JUDGMENT: 12/05/2000

BENCH:

M.B.Shah, B.N.Kirpal

JUDGMENT:

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

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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

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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

Another Vs. Union of India and others (1993) 2 SCC 582.

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

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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.

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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

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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

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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

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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

Investment Co. Limited and Another Vs. Reserve Bank of

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

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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

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Honble Court does not interfere with the decision of the

expert bodies which have examined the matter. The following

observations of this Honble Court made in R.K. Garg Vs,.

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.

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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

45-S. In the case of Reserve Bank of India Vs. Peerless

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

Enterprises Vs. Union of India, 1980 (4) SCC 507) this

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

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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

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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.