No Acts & Articles mentioned in this case
A
B
c
D
E
PEERLESS GENERAL FINANCE AND INVESTMENT
CO. LTD. AND ANR ..
v.
RESER VE BANK OF INDIA
JANUARY 30, 1992
[N.M. KASLIWAL AND K. RAMASWAMY, JJ.]
Reserve Bank of India Act, I934:
Sections 45K (3), 45J, 451 & 45L: Residuary Non-Banking
Companies-Receiving deposits under the saving schemes-Directions is-
sued by Jieserve Bank-,)uch companies to deposit with public sector
Banks or invest
in unencumbered securities the aggregate amounts of
liabilities to depositors-To disdose the same as liabilities in order to
secure return of the
"!Oney to depositors-,)uch directions whether statu-
tory in natllre-Whether ultra vires of Section 45K (3)-Whether violative
of Artlt:les 14 and I 9 (I) (g) of the Constitution of India.
Constitution
of India,
I950:
Articles 14, I9 (I) (g), I9 (6): Directions issued by Reserve Bank of
India to Residuary Non-Banking Companies under Sections 45 J and 45 K
of the Reserve Bank of India Act, I934 safeguarding the interest of the
depositor-Vires
of-Whether directions in the nature of reasonable re-· strictions.
Articles I 3 (I) and (2): Constitutionality of a statute--Real effect of
the statute to be seen by lifting the veil of form and appearance of
legislation_:negree of encroachment on fondamental rights-Considera
tion
of-Tests of fairness and reasonableness-Applicability
F of-Constitutionality of the statute-Presumption of-Balance between
public interest
and individual interest-Maintaining of
Practice & Procedure:
Function
of Courts-Matters relating to financial and economic
G
. policies--Bodies like Reserve Bank of India fully competent-Court not
to advise on such·matters.
While pronouncing its Judgment in Reserve Bank of India v.
Peerless General Finance and Investment
Co. Ltd., [1987] 1
SCC 424,
this Court ·observed that it would be open to the Reserve Bank of
H India (RBI) to take such steps as were open to it in law to regulate
406
'! -
,.._.
4
PEERLESS CO. v. R.B.I. 407
the savings schemes run by Residuary Non-Banking Companies (RNBCs) A
to prevent exploitation of ignorant investors while at the same time
taking care to protect the thousands
of employees working in such
companies. This
Court also expressed grave concern at the mush
room growth of financial ·investment companies offering staggering
rates of interests to· depositors leading to suspicion whether these
companies were speculative ventures floated to
attract unwary and · B
credulous investors and
capture their hard-earned savings.
Pursuant to the said observations of this Court and keeping in
mind the public interest, the RBI in exercise
of its powers under
sections 45J and 45K of the Reserve Bank of India Act, 1934, and of all powers enabling it in that behalf, issued certain directions by C
way of Notification No. DFC-55/DG (0)'87 dated 15.5.1987.
A
Writ
Petition was filed before the High Court challenging
the constitutional validity of the said directions issued by the RBI. A
Single Judge of the High Court palsed certain interim orders. Being
aggrieved against
the interim orders, the RBI preferred an appeal
before the Division Bench. The Division Bench disposed
of the
ap-·
peal as well as the Writ Petition. It held that the RBI was empow
ered to issue directions to the Residuary Non-Banking Companies in
the interest
of depositors; but to the extent such
direct.ions were
found
to be prohibitory or unworkable and as such unreasonable,
would be beyond the powers
of RBI. Peerless which became a party-respondent, filed an applica
tion for clarification
of the judgment, as regards payment against
discontinued certificates. The High
Court clarified that in such cases
the depositors be allowed
to take loan against payments made
till
discontiunance 'On such terms and conditions as the company may
stipulate.
The present appeals were filed
by RBI against the orders of
D
..
E
F
the High Court. A Writ Petition has been filed directly before this
Court, challenging the directions as being ultra vires of sections 45J G
and 45K of the.Reserve Bank of India Act, 1934 as also violative of
the provisions of the constitution.
On behalf of the Writ Petitioners it was contended that since
the 1987 directions issued
by RBI were in the nature of subordinate
legislation,
it was clear that RBI overstepped the bounds of the H
408 SUPREME COURT REPORTS [1992] I S.C.R.
A . parent statute; that the source of power for issuing the directions as
being derived from section 45L was only an after-thought;
that from · the working results it appeared impossible to carry on the tradi
tional business for any longer period without incurring huge losses;
that from in the business carried on by Peerless and other similar
RNBCs
that the working capital is generated out of the subscrip-
B tions received from the certificate holders either
in lump sum or in
instalments and such deposits
are paid back with the
guarante~d
accretions, bonus, interest etc. in terms of the contract at the ~nd of
the stipulated
term; that the interest of the depositors has not been
impaired in any manner. whatsoever by the method of accountancy
followed by Peerless and all similar companies, namely,
appropria-
C tion of a part of the subscription to the profit and loss account and
meeting the working capital requirements out of the same.
On behalf of the appellant-RBI, it was contended that it had
the power
to issue the
sai(I directions; that the said directions were
issued in pursuance to this Court's observations, and in public in-
D terest; that the said directions had not imposed any restriction on
the right to carry on business but only placed a restriction with
respect to one of the modes of raising reserves i.e. through public
deposits;
that the directions cannot be condemned as being violative
of Article 19(1) (g); and that the formula laid down by the High
Court was self-defeating and deprived altogether the benefits of
E security provisions given
to depositors under the 1987 directions.
F
On behalf of the Peerless Field Officers Association, it was
contended that if the directions of 1987 were to be upheld, the un
dertakings of Peerless would face inevitable closure and almost 14
lac field officers would lose their only source of livelihood.
Allowing the appeals filed
by RBI and dismissing the Writ
Petition filed by the Finance Companies, this Court,
HELD:
Per Kasliwal, J
1.1 The Reserve Bank was competent and authorised to issue
G ·the impugned directions of 1987, in· exercise of powers conferred
under Section 45K(3) of the Act. [431 CJ
1.2 A combined reading of Section 45J, 45K and 45L of the
Reserve Bank
of India Act, 1934 unmistakably goes to show that the
Reserve Bank if it
cousiders necessary in the public interest so to
H do,
can specify
the conditions subject to which any prospectus or
advertisement soliciting deposits of money from the public may be
_._ . --
PEERLESS CO. v. R.B.I. 409
issued. It can also give directions to non-banking institutions in A
respect of any matters relating to or connected with the receipt of
deposits, including the rates of interest payable on such deposits,
and the periods for which deposits may be received. This latter
power flows from sub-section (3) of Section 45K of the Act. The
Bank under thi.s provision can give directions in respect of any mat-
ters relating
to or connected
with the receipt of deposits. Thus a very B
wide power isi given to the RBI to issue directions in respect of any
matters ralating to or connected with tbe receipt of deposits. It
cannot be considered as a power restricted or limited to receipt of
deposits onlf. Soch an interpretation would be violating the lan
guage of section 45K (3) which furnishes a wide power to
the Re
serve
Bank to give any directions in respect of any matters relating C
to or connected with the receipt of deposits. The Reserve
Bank
under this provision is entitled to give directions with regard to the
manner in which the deposits are to be invested and also the man-
ner in which such deposjts are to be disclosed in the balance-sheet
or books of accounts
of the company. The word 'any' qualifying
matters relating to or connected with the receipt of deposits in the D
above provision
is of great significance and directions of 1987 are
fully covered under Section 45K (3) of the Act, which gives power to
the Reserve Bank to issue such directions. [430 D-H; 431 A]
1.3 When an authority lakes action which is within its compe
tence, it
cannot be said to be invalid merely because it purports to
be
made under a wrong provision, if it can be shown to be within its
power
under any other provision. [431 BJ
lmlian Aluminium Company etc. v. Kera/a State Electric.ity Hoard,
[1976] 1 SCR 70, relied on ..
E
F
2.1 The function of the Court is to see that lawful authority is
not abused but not to attain itself'thc task entrusted to that author
ity. It is well settled that a public body invested with statutory
powers must take care not to exceed or abuse its power. It must
keep within the limits of the authority committed to it. H must act
in good faith and it must act reasonably. Courts are not to interfere G
with economic policy which
is the function of experts. It is not the
function of the Courts to sit in Judgment over matters of economic
policy
and it must necessarily be left to the expert bodies. The func-
tion
of the Court is not to advise in matters re.lating to financial and
economic policies for which bodies like Reserve Bank arc
fully com
petent.
It would be hazardous and risky for the Courts to tread an H
410 SUPREME COURT REPORTS [1992) I S.C.R.
, A unknown path and should leave such task to the expert bodies.
[442 C..D]
2.2 Reserve Bank of India which is bankers' bank is a crea-.
lure of Statue. It has large contingent of expert advice relating to
matters affecting the economy of the entire country and nobody can
B doubt the bonafides of the Reserve Bank in issuing the impugned
directions of 1987. The Reserve Bank plays an important role in the
economy and financial affairs of India and one of its important
functions is to regulate the banking system in the country. It is the
duty of the Reserve Bank .to safeguard the economy and financial
stability of the country. In fact the directions of 1987 were issued by
C RBI after mature consideration with the help and advice of experts.
[441 B-D, 443 D-E]
Delhi Cloth and General Mills etc. v. Union of India etc., [1983]
3 SCR 438; Mis Prag Ice & Oil Mills and Anr. v. Union of India,
[1978] 3 SCC 459; Shi-i Sitaram Sugar Company Limited and Anr. v.
D Union of India & Ors .. [1990] 3 SCC
0
223; RX Garg v. Union of India
& Ors. etc. etc., [1981) 4 SCC 675, relied on.
3.
The Reserve Bank was right in taking the stand tha't if the
companies want to do their business, they should invest their own
working capital and find such resources elsewhere with which the
E Reserve Bank has no concern. [445-C]
4.
It is not the concern of this Court to find out as to whether
actuaial method of accounting or any other method would be feasi
ble or possible for the companies to adopt
while carrying out the
conditions contained in paragraphs 6 and 12 of the directions of
F 1987. The companies are free to adopt any mode of accounting
permissible under the law but it is certain that they will have to
follow the entire terms and conditions contained in the directions of
1987 including those contained in paragraphs 6 and 12. [445 E-F]
G
H
'
5.1 It is not possible for the Court to determine as to how
much percentage of deposit of first instalment should be allowed
towards expenses which may consist of commission to agents, office
expem;es etc. It would depend fro.m company to company based on
various factors such as paid-up capital, percentage of commission
paid to the agents, rate of interest paid to the depositors, period of
maturity for repayment, office expenses and various other factors
necessary to mop up working capital out of the depositors money_.
" -
1 I-
•
>·
,.\_
·
•
PEERLESS CO. v. R.B.I. 411
One cannot ignore the possibility of persons having no stake .of their A
own starting such business and after collecting huge deposits from
the investors belonging to the .poor and weaker sections of the soci-
ety residing in rural areas, and to stop such business after a few
years thus devouring the hard earned money of the small investors.
In such kind of business,
the agents
always take interest in finding
new depositors because
th.ey get a high rate of commission out of the B
first
instalment, but they do not have same enthusiasm in respect of
deposit of subsequent instalments. In these circumstances if the Re
serve Bank bas issued the directions of 1987 to safeguard the larger
interest of the public and small depositors it cannot be said that the
directions are •so unreasonable as to be declared constitutionally
invalid. [447 E-H, 448-A] C
S.2 It cannot he said that the directions of 1987 amount to
prohibition of the business in a commercial sense and without rea
sonable basis. Nor are the directions violative of Article 19(1) (g) or'
the Constitution of India. [442 G-H, 443 A-BJ
· Mohammad Yasin v. The Town Area Committee, Jalalabad and
Anr.,
[1952)
SCR 572; Premier Automobiles Ltd. and Anr v. Union of
D
~ _.1,_ India, AIR .1972 SC 1690; Shree Meenakshi Mills ltd.· v. Union of
India, AIR 1974 SC 366, referred to.
6. So far as Peerless is concerned there is no possibility of its E
closing down such business. It has already large accumulated funds
collected by making profits in the past several years. Thus it has·
enough working capital in order to meet"the expenses. It cannot be
said that after some years Peerless will have to close down its busi
ness if the directions contained in paragraphs 6 and 12 are to be
followed. The working capital is not needed every year as it can be F
rotated after having invested once.
If the entire amount of the
sub
scriptions is deposited or invested in the proportion of 10% in pub-
lic sector banks, 70% in approved securities and 20% in other in
vestments, such amounts will. also start earning interest. which can
be added and adjusted while depositing or investing the subsequent
years' deposits of the subscribers. In any case it lies with the new G
entrepreneurs while entering such field of business to make arrangement
of their
own resources for working
capital and for meeting the ex
penses and they cannot insist in utilising the money of the deposi-
tors for this purpose. So far as the companies already in this field
they must have earned profits id the past years which can be uti
lised as their working capital. It is important to note that the direc-H
412 SUPREME COURT REPORTS [1992] 1 S.C.R.
F
.r::
A tions of 1987 have been made applicable from 15th May, 1987 pro-
spectively and not retrospectively.
(447 H; 448
C-F)
'7-
~""
7. The directions of 1987 as well as any other directions is-
sued from time
to time by the Reserve
Ban~ relating to economic or
financial policy are ne~r so sacrosanct t&at the same cannot be
B changed. Even the financial budget for every year depends on the
economic and financial policy of the Government existing at the
relevant time. So far as the impugned directions are concerned if it
is found in future that the same are not workable or working against
I
the public interest, the Reserve Bank is always free to change its •
policy and scrap or amend the directions as a11d when necessary. If -.,_
c at any time, the Reserve Bank feels that.the business of the kind run
at present by the Peerless and other companies in terms of the
directions of 1987
are not yielding the
result as envisaged by the
Reserve Bank, it will always be prepared to consider any new pro-
posals which may be conductive both in the interes_t of the large
multitude of the investors
as well as the employees of such coinpa-
D nies. !448 G-H, 449 A-BJ
Per Ramaswamy, J.
(Concurring) :
' ,_ -
t .. The directions of 1987 issued by RBI are within the powe·r
of the RBI to provide tardy, stable, identifiable and monitorable
E method of operations by each RNBC and its, compliance of the di-
rections. This will ensure security to the depositors at all times and
also make the accounts of the company accur.ate, ~ccountable and
easy to monitor the working system of the company itself and con-
tinuance of its tvorkmen. The directions in paragraptis 6 and.l2 are
F
just, fair and reasonable not only to the depositors, but in the long
run to the very existence of the company and its continued business
itself. Therefore, they
are
legal, valid and.constitutionally permissi-,..A.
hie. [464 G-H, 465-AJ
2. Section 45K of'(he Reserve Bank of India Act empowers
G
the RBI to collect information from non-banking institutions as to
deposit and to give directions that every non-banking institution
shall .furnish to the Bank, in such form, at such intervals and within
such time, such statements, information or particulars relating to or·
connected with deposits received by the n'on-banking institution, as
may be specified _by RBI by general or special order including the
H
rates of interest aild other terms and conditions on which they arc
received. Under. sub-se~tion (3) thereof the RBI is entitled to issue
J.o.
. -'"·
PEERLESS CO. v. R.B.I. 413
in the public interest directions to non-banking institutions in re
spect of any matter relating to or connected with the receipt of
deposits including the rates of interest payable on such deposits and
the periods for which deposits may be received. The use of the
adjective
'any' matter relating to or connected with the receipt of
deposits is wide and comprehensive to empower the RBI to issue
directions in connection therewith
or relating to the. receipt of
de
posits. But exercise ofthe power is hedged with and should be 'in
the public iuterest'. [450 C-F]
3.1 The State can regulate the exercise of the fundamental
right to save the public from a substantive evil. The existence of the
evil as well as the means adopted to check it are the tnatters for the
legislative judgment. But the court i~ entitled to consider whether
the degree and mode of the regulation is in excess of the require
ment or is imposed in an arbitrary manner. The Court has to see
whether the measure adopted
is
relevant or appr1tp.riate to the power
exercised by the authority
or whether it over
stepped the limits of
social legislation. Smaller inroads may lead to larger inroads and
ultimately result in total prohibition by indirect method. If it di
rectly transgresses or substantially and inevitably affects the f11nda
mental right, it becomes unconstitutional, but not where the impact
is only remotely possible or incidental. The Court must lift the veil
of the form and appearance to discover the true character and the
nature of the legislation, and every endeavour should be made to
have the efficacy of fundamental right maintained and the legisla
ture is not invested with unbounded power. The Court has, there
fore, always to guard against the gradual encroachments and strike
down a restriction as soon as it reaches that magnitude of total
annihilation of the right. [453 F-H, 454 A]
3.2 In the interest of the general public, the law may impose
restrictions on the freedom of the citizen
to start or carry on his
business.
Whether an impugned provision imposing a fetter on the
exercise of the
fundamental right guaranteed by Article 19(1) (g)
amounts
to a
reasonable restriction imposed in the interest of gen
eral public, must be adjudged not in the background of any theo
retical standard or pre-determinate patterns, but in the light of the
nature and the incidence of the right, the interest of the general
public sought to be secured by imposin£ restrictions and the rea
sonableness of the quality and the extent .of the fetters imposed by
the .directions. The credit worthiness of RNBCs undoubtedly would
A
B
c
D
E
F
G
H
414 SUPREME COURT REPORTS [1992] 1 S.C.R.
A he sensitive. It thrives upon the confidence of the public, on the
honesty of its management and its reputation
of solvency. The di
rections intended to promote
'freedom' and facility which are re
quired to be regulated in the interest of all concerned. (457 E-F]
Hatisingh Mfg. Co. Ltd. & Anr. v.
Union of India & Ors., (1960)
B 3 SCR 528; Latafat Ali Khan & Ors. v. State q( U.P., (1971) Supp.
c
D
E
G
H
SCR 719, relied on.
4.
There is presumption of constitutionality of every statute
and its
validity is not to be determined by artificial standards. The
court has to examine with some strictness the substance of the legis
lation to find what actually and really the legislature has done.
The
court
would not he over persuaded by the mere presence of the
legislation. In adjudging the reasonableness of the law, the court
will necessarily ask the question whether the measure or scheme is
just, fair, reasonable and appropriate or unreasonable, unneces
sary and arbitrarily interferes with the exercise of the right guaran
teed in Part III of the Constitution. The Court has to maintain a
delicate balance between the public interest envisaged
in the chal
lenged provision and the individual's right taking into account the
nature of his right said to be infringed, the underlying purpose of
the restriction, the extent and urgency of the evil sought to be
rem:
edied thereby, the disproportion of the restriction imposed, the
prevailing condition
at the time, the surrounding circumstances, the
larger public interest which the law seeks to achieve and all other
relevant factors germane for the purpose. All these factors should
ente1r into the zone of consideration to find the reasonableness of the
impugned restriction. The
Court weighs in each case which of the
two conflicting public
or private interest demands greater protec
tion
and if it finds that the restriction imposed is appropriate, fair
and reasonable, it
would uphold the restriction. The court would
not uphold a restriction which
is not germane to achieve the pur
pose of the statute or is arbitrary or out of its limits. [454 B-C, E-G]
S. The directions are incorporated and became part of the
Act itself. They must be governed by the same principles as the
statute
itself. The statutory presumption that the legislature inserted
every
part thereof for a purpose and the
legislative intention should
be given affect to, would be applicable to the directions of 1987 as
well. 1~45-E)
6.1 The RBI issued the directions to regulate the operations
PEERLESS CO. v. R.B.I. 415
of the RNBCs, to safeguard the interest of the depositors. Pay~ A
ment of interest, bonus, premium or other advantage, in whatever
name it may be called is reward for waiting or parting with li
P,cidlty. It is paid because of positive time preference (one rupee
today is preferred to one rupee tomorrow) on the part of the
depositor.
Therefore, the directions avowed to preserve the right
of the depositors to receive back the amount deposited with the B
contracted rate of interest; it aims to prevent depletion of the
deposits
collected from the weaker segments of the society and
also tends to affect free now of the business of the RNBCs who
would desire to
operate in their own way. [455 F-H]
6.2· Mushroom growth of non-banking agencies put afloat di- C
verse schemes with alluring offers of staggering high rate of inter-
est and other catchy advantages which would generate suspicion
of the bona fidcs of the offer. But gullible depositors arc lured to
make deposits.
It is not uncommon that after
collecting fabulous
deposits, some unscrupulous people surreptiously close the com
pany. and decamp with the collections keeping the depositors at D
bay. Therefore, the need to regulate the deposits/subscriptions, in
particular in private sector became imperative to prevent exploi
tation
or mismanagement as a social justice strategem. [457 A-BJ
6.3 RBI occupies place of
'pre-eQ\,inence' to ensure monetary
discipline and to regulate the economy or the credit system of the
country as an cxp·ert body. It also advises the Government in pub
lic finance and
monetary regulations. The banks or non-banking
institutions
shall have to regulate their operations in accordance
with not only as per the provisions of the Act but also the rules
and directions or instructions issued by the RBI in exercise of the
power
thereunder.
Chapter 3B tif the Reserve Bank of India Act
expressly deals with regulations
of deposit and finance received
by the
RNBCs. The directions, therefore, arc statutory regula
tions. [455 B-D]
E
F
Joseph Kunivilla Vellukunne! v. Reserve Bank of India & Ors.. G
[1962] Suppl. 3 SCR 632; State~( UP. v. Jlabu Ram. [1961] 2 SCR
679; D. V.K. Prasada Rao v. Govt. of A.P., AIR 1984 A.P. 75, relied
on.
7. The objects
of the direction are to preserve the
ability of
the _RNBC to pay back to the subscribers/depositors at any given H
416 SUPREME COURT REPORTS fl 992] I S.C.R.
A time; safety of the subscribers' money and his right to unencumbered
repayment are thus of parall}ount public interest and the direc
tions aimed to protect them. The directions cannot and would not
be adjudged to be ultra vires or
arbitrary by reason of
successful
financial management of an individual company. An overall view
of the working system of the scheme is re!evant and germane.
B [460 C-D]
8. The obligation in paragraph 12 of periodical disclosure in
the accounts of a company of the deposits together with the interest
secured thereon, whether or not payable, but admittedly due as a
liability, is to monitor the discipline of the op~ration of the schemes
C and any infraction, would be dealt with as per law. The certificate
by a qualified Chartered Accountant is to vouchsafe the correctness
and authenticity of accounts and would and should adhere to the
statutory compliance. [460 D-E]
D
E
F
G
H
9. The
settled accounting practice is that a loan or deposit
received from a creditor has to
be shown as a
liability together with
accrued interest whether due or deferred. The actuarial accounting
applies to revenues and costs to which the concept of the 'going
concern' can
be adopted. Therefore, in providing the costs of the
company it can set
apart its costs on the basis that
liability is cre
ated for interest, bonus etc. payable in foreseeable future. Undoubt-
edly the actuarial principle applied by the LIC or the gratuity schemes
are linked with life of the assured or the premature death before
retireinent of an employee, but RNBC in its contract does not un
dertake any such risk. The deposit or loan is a capital receipt but
not a revenue receipt and its full val'ue shall be shown in the ac
count books or balance-sheet as liability of the company. It cannot
be credited to the profit
and.
loss account. Part II of Schedule I of
the co'mpanies Act, 1956 ·requires that the amoont shown in the
profit and loss account should be confined to the income and ex
penditure of the company.
Para 12 of the
di'rections is, thus, in
consonance with the Companies Act. Paragraph 6 only elongates the
contract in the public interest ,to safeguard the interest of the vul
nerable sections of the depositors. The RBI cannot be expected to ·
constantly monitor the working of the RNBC in its day-to-day func-
tion. The actuarial basis cannot he adopted by the RNBCs. and the
liability must always be reflected in its balance-sheet at its full value.
Compliance of the direction in para 12, dehors any method of ac-
countancy adopted by a company, intended to discipline its opera
tions. [460 E-H, 461 A-CJ
)
.> .
' ......
PEERLESS CO. v. R.B.I. 417
10. Regulation includes total pro_hibition in a given case where
the. mischief to be remedied warrants total prohibition. The direc
tions of 1987
are peither
palpably arbitrary nor unjust nor unfair .
. The mechanism evolved in the directions is fool-proof, to secure the
interest of the depositors,
as
well is capable of monitoring the busi
ness management of every RNBC.
It
also protects the interest of the
·employees/field sfaff/commission agents etc. on permanent basis over
coming initial convulsion. It was included, in the best possible man-
' ner, to subserve the interest llf all wilhout putting any prohibition
in the ability of a company to raise the deposit, even in the absence
of any adequate paid
up
capital or reserve fund or such pre-com
mitment of the owner, to secure such deposits.
[4.62 E-G]
Narendra Kumar v.
Union of India, (1960) 2 SCR 375, relied on.
Rese1ve Bank of India etc. v, Peerless General Finance and In
' vestment Qi. Ltd. & Ors. etc., [1987] 2 SCR 1, referred to.
A
B
c
11. So
long as the power is traceable l~Ahe statute, mere omis-D
sion
to recite the provision does not denude the power of the
legisla
ture or rule making authority to make the regulations, nor consid
ered without authority of law. The asbsence of reiteration of objec
··tive satisfaction in the preamble as of one under Section 45L does
not denude the powers; the RBI admittedly has the power under
Section 45L, to justify the actions. Though Section 45L was neither E
expressly stated nor mentioned in the Preamble of the directions of
the required recitation or satisfaction of objective facts to issue the
directions, from the facts and circumstances it
is demonstrated that
the RBI, had such satisfaction
in its consideration the power under
Section 45L, when the directions were issued. Even otherwise
Sec-
tion 45K (3) itself is sufficient .to uphold the directions. (464 F-H] F
12. The court has to see whether
the. scheme, measure or regu
lation adopted is relevant or appropriate to the power exercised by
the authority. Prejudice to the interest of depositors is a relevant
factor. Mismanagement or inability to pay the accrued liabilities
are evils sought to be remedied. The direstions of 1987 designed to G
· preserve the right of the depositors and t)le ability of RNBC to pay
back the contractual liability. It also intended to prevent misman
agement of the deposits collected from vulnerable social segments
who have
no
knowledge of banking operations or credit system and
repose unfounded bHnd faith on the company with fond hope of its
ability to pay back the contracted amount. Thus the directions maintain H
418 SUPREME COURT REPORTS [1992] I S.C.R.
A the thrift for saving and streamline and strengthen the monetary .,.__
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operations of RNBCs. [463 E-G]
ORIGINAL
JURISDICTION: Writ Petition (Civil) No. 677of1991.
(Under Article 32 of the Constitution of India)
WITH
Civil Appeal Nos.400-403 of 1992.
Shanti Bhushan, Somnath Chatterjee, Biswarup Gupta, Bhaskar Gupta,
G.L. Sanghi, Arun Jaitley, Dr. Debi Pal, Anil Diwan A.K. Sen, Harish N.
Salve, H.S. Parihar, Kuldip S. Parihar, Gopal Subramanium, Abhijit
Chatterjee,
B. Lahiri, J.B. Dadachanji,
S. Suku.maran, R.F. Nariman, G.S.
Chatterjee, Ms. Sumita Chatterjee, Ms. Mridula Ray, Arun Madan, Ms.
Priya Hingorani, Ms. Radha Rangaswamy, C.N. Sreek41llar, Rathin Das,
Ranjit Ghose, Sushi! Kumar Jain, Sudhanshu Atreya and Dr. A.M. Singhvi
for the appearing parties.
The Judgment of the Court was delivered by
KASLIWAL, J. Special Leave granted in all the petitions.
This litigation is an upshot of the earlier case Reserve Bank of India
v. Peerless General Finance and Investment Company Ltd. and Others,
[1987) 1 S.C.C. 424 decided on January 22,1987. In 1978 the Prize Chits
and Money Circulation Scheme (Banning) Act, 1978 (in short 'the Ban
ning Act, was enacted 'to ban the promotion or conduct of prize chits or
money circulation schemes and for matters connected therewith or inci
dental 'hereto.' The question which arose in the above case was whether
the Endowment Scheme piloted by the Peerless General Finance and In
vestment Company Ltd.; (hereinafter in short 'the Peerless') fell within
the definition of 'Prize Chits' within' the meaning of Sec. 2 (e) of the
above Banning Act. By a letter dated July 23, 1979, the Reserve Bank of
India
pointed out to the
Peerless that the schemes conducted by it were
covered by the provisions of the Banning Act which had come into force
w.e. f. December 12, 1978. On September 3, 1979 the Peerless filed a WJ'it
petition in the Calcutta High Court for a declaration that the Prize Chits
Banning Act did not apply to the business carried on by the Peerless. A
s.miI:u .writ petition was filed questioning a notice issued by the Madbya
Pradesh Government on the same lines as that issued by the West Bengal
PEERLESS CO. v. R.B.l.[KASLIW AL, J.] 419
Government. A learned Single Judge of the l:jigh Court dismissed both A
the writ petitions but appeals preferred by the Peerless under the Letters
Patent were allowed by a Division Bench of the Calcutta High Court.
It was declared that the business carried on by the Peerless did not
come within the mischief
of the
Prize Chits Banning Act. Against the
judgment
of the Division Bench of the Calcutta High Court, the Reserve B
Bank
of India, .the
Union of India and the State of West Bengal preferred
appeals before this court. The question considered
in the above case was "Is the endowment scheme of the Peerless Company a Prize Chit within
the meaning
of
Section 2(e) of the Prize Chits and Money Circulation
Schemes (Banning) Act?" This court held that section 2(e) does not
contemplate a scheme without a prize and, therefore, the Endowment
C
Cert.ificate
Scheme of the Peerless Company was outside the Prize Chits
Banning
Act: Appeals tiled by the Reserve Bank of India, the
Union of
India and the State of West Bengal were accordingly dismissed. Chinnappa
Reddy,
J. observed:
"It is open to them to take such steps as are open to them in
law to regulate schemes such a5 those run by the Peerless
Company to prevent exploitation of ignorant subscribers. Care
must also
be taken to protect the thousand of employees. We
must
also· record our dissatisfaction with some of the schemes
D
of the Life Insurance Corporation which appear to us to be
even less advantageous to the subscribers than the Peerless
Scheme. We suggest that there should be a complete ban on
forfeiture clauses
in all savings schemes, including Life Insur
ance
Policies, since these clauses hit hardest . the classes of
people who need security and protection most: We have ex
plained this earlier and
we do wonder
':"hether the weaker
sections
of the people are not being made to pay the more F
affluent sections' Robbing
Peter to pay Paul? It was further
observed "We would also like to query what action the Re
serve Bank
of India and the
Union of India are taking or pro
posing to take against the mushroom growth
of finance and
investment
companies" offering staggeringly high rates of in
terest
to depositors leading us to suspect whether these compa
E
G
nies are not speculative ventures floated to attract unwary and
credulous investors and capture their savings.
One has only to
look at the morning's newspaper to be greeted by advertise
ments inviting deposits and offering interest at astronomic
rates. On January l, 1987 one of the national newspapers pub
lished
from Hyderabad, where one of us happened to be spend-
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420 SUPREME COURT REPORTS [1992] I S.C.R.
ing the vacation, carried as many as ten advertisements with
'banner headlines' covering the whole
of the last page, a quar
ter
of the first page
and• conspicuous spaces in other pages
offering fabulous rates
of interest. At least two of the advertis
ers offered to double the deposit
in
30 months, 2000 for 1000,
10,000 for 5,000, they said. Another advertiser offered interest
ranging between 30 per cent to 38 per cetit for periods ranging
be.tween six months to five years. Almost all the advertisers
offered extra interest ranging between 3 per cent to 6 per cent
if deposits were made during the
Cbristmas-Pongal season.
Several of them offered gifts and prizes. If the Reserve Bank
of India considers the Peerless Company .with eight hundred
crores invested
in government securities, fixed deposits
~th
National Banks etc. unsafe for depositors, one wonders what
they have to say about the mushroom non-banking companies
which are accepting deposits, promising most unlikely return
and what action
is proposed to be taken to protect the inves
tors. It does not require much
imaginahon to realise the adven
. turous and precarious character
of these businesses.
Urgent
action appears to be called for to protect the public. While on
the one band these schemes encourage two vices affecting
public economy,. the desi~e to make quick and easy money
and the habit
of excessive and wasteful consumer spending,
on the other hand the investors who generally belong to the
gullible and less affluent classes have no security whatsoever.
Action appears
imperative."
Khalid, J., another learned Judge aggreeing with the judgment of
Chinnappa Reddy, J., further added his short but important concluding
paragraph as under :
"I share my brother's concern about the mushroom growth of
financial companies all over the country. Such companies have
proliferated. The victims
of the schemes, that are attractively
put forward
in public media, are mostly middle class and lower
middle class people. Instances are legion
where such needy
people have been reduced penniless because
of the fraud played
by such financial vultures.
It is necessary for the
authorities to
evolve fool-proof schemes to see that fraud
is not allowed to
be played upon persons who are not conversant with the prac
tice
of such financial enterprises who pose themselves as bene
factors
of
people."
Taking note of the weighty observations made by this Court, the
PEERLESS CO. v. R.B.I.[KASLIW AL, l.] 421
Reserve Bank of India in exercise of the powers conferred by Section 45 A
(J) and 45 (K) of the Reserve Bank of India Act, 1934 (hereinafter re
ferred to as the Act) and of all the powers enabling it in. this behalf and
considering it necessary in the public interest issued certain directions by
notification No. DFC.55/DG(0)-87 dated the 15th May, 1987 (hereinafter
referred to as the 'directions
of 1987'). The const.itutional validity of these
directions
of 1987 was challenged by Timex Finance and Investment Com- B
pany Ltd. (hereinafter referred t.o as 'Timex Company') by filing a writ
petition in the Calcutta High Court before the 'teamed
Single Judge. The
learned Single Judge granted an interim ·Order in terms of prayers (g) and
(h)
of the writ petition. The Reserve
Bank of India aggrieved against the
mterim order filed an appeal before the Division Bench. A stay petition
was also moved on behalf
of the Reserve
Bank of India for staying the C
operation of the order dated 7th October, 1988 passed by the learned
Single Judge. After hearing the stay petition for sometime, the Division
Bench
of the. High Court listed the appeal as well as the stay petition for
final disposal. The Division Bench
of the High Court disposed of the
appeal as well as the writ petition
by an order dated March 23,
1990 and
arrived to the following findings and conclusions: D ·
"(a) Reserve Bank of India is empowered tci issue directions to the
residuary non,banking companies under the provisions of Sec
tion 45J and 45K of the Reserve Bank of India Act, 1934 for the
interest
of thousands of depositors.
(b) However, to the extent such directions are found to be
prohibi
tory or not workable and as such unreasonable must be held to
be beyond the powers
of the Reserve Bank oflndia.
·
( c) The impugned directions providing that they represent irreduc-
E
ible minimum for safeguarding the interest of and for preventing
exploitation
of small and unwary depositors cannot be imple-F
mented without suitable modification. It is not reasonably practi-. cable to comply strictly with the directions as they stand by the
writ petitioners and the similarly situated companies. The Su·
preme Court in Peerless case (Supra) ... reserved the liberty to the
Reserve Bank of India to take such steps as are open to them in
law to regufate the schemes such as .those granted by the Peerless G _
to prevent exploitation of subscribers and to p10lect-lho11sands of
employees. The impugned directions without modifications will
_ run counter to the aforesaid directions of the Supreme Court.
(d) The. business
of savings and investments carried on by .the
com
pany and similarly situat.ed companies having not been declared
unlawful or banned, power
of the .Reserve Bank of India to regu- H
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422 SUPREME COURT REPORTS [1992] I S.C.R.
late such business cannot be pennitted to be prohibitory resulting
in the ultimate closure of the business carried on by the writ
petitioner company and other similarly situated companies. If the
modifications as suggested by us are not implemented and if
ultimately
the business is closed down and the company goes
into liquidation, the hard earned money of thousands of
deposi
tors will be lost and the employees would also lose their job. If
even after modifications are made to the impugned directions in
tenns of this order, any company· fails to comply with such di
rections, the Government may take such steps as are open to
them to protect the interests of the thousands of small depositors
and.numerous employees.
(e) The reasons why the impugned directions cannot be complied
with and are held to be unworkable and unreasonable are mainly
because of the definition of liability assigned in the impugned
directions. The impugned directions, as they stand now, cannot
be implemented by the residuary non-banking companies with
out incurring loss irrespective of their net-worth. According to
the impugned directions, the liability is the amount of money
deposited by the depositors plus the amount of interest whether
or not due to them according to the tenns of the respective
contracts at the given point of time. In other words, the entire
collection
with the interest, Bonus etc. whether
Ifayable or not
would be the liability of the Company. This leaves no fund for
working. If the definition of liability is amended as suggested by
us,' it will be possible for the companies to generate working
capital. In our view, liability in clause 6 and in other clauses of
the impugned directions should be construed to mean total amount
of contractual dues of the depositors including interest, premium,
bonus or other advantages by whatever name called, accrued on
the amount according to the terms of contract. Section 451 and
45K of the Act do not authorise the Reserve Bank of India to
introduce a concept of liability which is contrary to the accepted
com1nercial practice and trading principles. The i1npugned di
rections have failed to make distinction between the actual li
ability in presenti and a liability de fimiro. Liberty must be
reserved to the companies to adopt normal accountancy practice
recognized and accepted in the trading circles so long as such
accounting practice provides for payment of the liability to the
depositors in accordance with the contractual obligations. How
ever, the Reserve Bank of India may, having regard to the facts
and circumstances of each case issue directions regulating the
administrative and management expenses and expenditure on com-
PEERLESS CO. v. R.B.I.[KASLIWAL, l.] 423
~ mission and publicity. In the impugned directions no restriction A
has been imposed on the expenditure by a residl(rry non-banking
company
on any of these heads.
In our view,_the impugned directions without modifications, in-
stead
of suppressing the mischief, will only lead to adverse un-
workable and/or impracticable results inasmuch
as if the residu-
B ary non-banking companies cannot comply with such directions
in toto, such companies have to go out of existence. This cannot
be the object of the impugned directions. If the liability in terms
of the contractual obligations is provided not only in
-the ac-
counts but also by suitable investment
in terms of Clause 6 of
the directions, in our view, all the residuary non-banking compa-
c nies, irrespective of their net worth, will be able to carry on the
business.
(t) Every residuary non-banking company shall disclose its liability
in its Books of Accounts and balance sheet the aggregate amount
of liability accrued and payable to
the· depositors in .accordance
with the terms
of the contract.
D
(g) The directions contained in clause 6 for deposit or investment
and the liability shall
be read subject to the modification of the
designation
of the liability as aforesaid.
(h) The directions are prospective. The period of deposit
and· the
date
of return with respect to all certificates issued prior to 15th
May 1987 have been excluded from the purview of the directions E
as per ciause 18 (!).This exemption should.include all contrac-
tual obligations
on those certificates.
(i)
All funds prior to the issue of the directions should be allowed to
be kept in the
mannh as was being done by the respective re-
siduary non-banking
c.ompany. The direction with regard to the
F
investment shall be
·ap.plicable from the money collected and/or
received on and after 15th
May 1987. The
companies shall be
allowed reasonable time to make good the deficiency in the in-
vestment required to
be made in terms of the directions after
15th May
1987.
Gl We are not unmindful of the fact that exercise of power by
G
legislature llnd executive is subject to judicial restraint. The only
check
on judicial exercise of power is the self-imposed disci-
pline
of judicial restraint. But although the courts in exercise of
judicial power are not competent to direct the enactment of a
particular provision
of law, ifthe statutory directions suffer from
.. _
arbitrariness, the court is competent to issue necessary direction
H
so that. the statutory directions may be brought in conformity
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424
SUPREME COURT REPORTS
, [1992] I S.C.R.
with law. As we have held that the Reserve Bank of India has
transgressed the statutory power to the extent indicated else
where
in the judgment, we are of the view that the Reserve Bank
of
India shall modify the directions and make them reasonable
and workable to safeguard
the interest of depositors and protect
the
employees."
The Division Bench also considered an application filed by Favour
ite Small Investment Company and by order dated 20th December, 1990
directed that the Reserve Hank of India should revoke the prohibitory
order and permit Favourite Small Investment Company to accept fresh
deposits
.and
carcy on new business.
' . -. ., ·~· .
It may be noted that the Peerless filed a petition before the High
Court for becoming a· party-respondent .. The High Court by order dated
31st August, 1990 allowed the said application and further ordered that
the cause title and the records proceedings
of appeal,
memorandum of
appeal and. the paper book filed be amended accordingl'y. The Peerless
also moved an application for clarification of the judgment and order
dated 23rd March, 1990. it' prayed that suitable provision should be made
for a depositor who wants back
the money before maturity. If the deposi
tor intends to get refund
of the money invested before the expiry of actual
contract period, he should.
be required to keep the funds for a miriimum
period
in aceordance with the
contr.11ct. Before maturity he can only take
loan but not the principal amount with interest. The amounts
of returns
should also
be less than 5 per cent to provide for the collection and o.ther
expenses
of the non-banking companies. The Division Bench of the High
Court took the view that the order dated 23rd March, 1990 required clari
fication
as it was not made clear as to whether non-residuary banking
companies are under an obligation to pay discontinued certificates before
the stipulated period
in the contract, if so what would be the rate of
interest. The Division Bench by order dated December 24, 1990 clarified
its earlier order dated 23rd March,
1990 as under :
"(a) If the contract by and between the company and the depositor
provides that no payment
on discontinued certificate will be made
before the expiry
of the term stipulated in the contract, in such
cases,
if the certificate is discontinued any time before such
stipulated term and payment
is made to the depositors according
to the terms and conditions
of the contract, in other words, on
the expiry
of the term stipulated in the contract,
sui:h depositor
shall
be paid interest at the rate of 8% compound per annum, but
in such a case the company will be at liberty to deduct an amount
not exceeding
5% from the total return in or to provide for
collection and other expenses' incurred
in connection with these
~·
PEERLESS CO. v. R.B.l.[KASLIW AL, J.) 425
discontinued certificates
(b)
hi cases where certificates are ·discontinued before or after the
I
stipulated tenn but the depositors obtain refund only upon matu-
rity
of the certificates such refund shall be made to the deposi
tors with compound interest at the rate
of 8% per annum without
any deduction whatsoever.
(c) Since
no payment will be made against the discontinued certifi
cates to the depositors
in such
cases shall be pennitted to take
loan,
if they so intend, against the payment made till discontinu
ance
of such tenns
ancl conditions as the company may stipu
late."
A
B
The Reserve Bank of
India aggrieved against all the above orders of C
the Calcutta High Court has filed appeals against the orders dated 23rd
March, 1990, 31st August, 1990, 20th December, 1990 and 24th De
·cember, 1990. The Peerless General Finance and Investment Company
Ltd.,
has also filed a writ petition No. 671 of 1991 directly before this
Court under Article
32 of the Constitution of India.
·
·In view of the fact that the questions raised in the appeals filed by
the Reserve Bank of India against the orders of the High Court and in the
D
;.. civil writ petition filed by the Peerless Company are common, the same
were heard together and are disposed
of by a single order. Interlocutory
applications were also filed on behalf
of the employees of the Peerless
Company, agents
of Peerless Company working in the field, and some of E
the depositors
in the Peerless company.
W_e have heard.them also.
The main controversy centers round paragraphs (6) and (12)
of
the·
directions of 1987 and as such the same are reproduced in full.
l'aragraplrf6j Security for depositors
On and from 15th May 1987-
(1) Every residuary non-banking company shall deposit and keep
deposited in fixed deposits with public sector banks or invest and
keep invested in unencumbered approved securities (Such secu-G
rities being valued at their marked value
for the time being), or
in other investments, w)lich in the opinion of the company are
safe, a
sum which shall not, at the close of business on 31st
December
1987 and thereafter at the end of each
half year that
is, 30th June and 3 lst n,;cember be less than the aggregate amounts
of the liabilities to the depositors whether or not such amounts H
have become payable:
426
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SUPREME COURT REPORTS [1992] I S.C.R.
Provided that of the sum so deposited or invested
(a) not less than ten percent shall be in fixed deposits with
any of the public sector banks;
(b) not less than 70 per cent shall be in unapproved securi
ties;
(c) not more than 20 per cent or ten times the net owned
funds of the company, whichever amount is Jess, shall be
in other investments, provided that such investments shall
be with the approval of the Board of Directors of the
Company.
Explanation :
"Net owned 'funds" shall mean the aggregate of the paid-up
capital
and free reserves as appearing in the latest audited
balance sheet of
the company as reduced by the amount of
accumulated
balance of loss, deferred revenue expenditure and
. other intangible assets, if any, as disclosed in the said balance
sheet.
(2) Every residuary non-banking company shall entrust to one of the
public sector banks designated in that behalf, deposits and secu
rities referred
to in clauses (a) and (b) of the proviso to
sub
paragraph (I) to be held by such designated bank for the benefit
of the depositors. Such securities and deposits shall not be with
drawn by the residuary non-banking company, or otherwise dealt
with, except for repayment to the depositors.
(3) Every residuary non-banking company shall furnish to the Re
serve Bank within thirty days from the close of business on 31st
December 1987 and thereafter at the end of each half year that is
as on 30th June and 31st December, a certificate from its audi-~
tors, being members oflnstitute of Chartered Accountants, to the
effect that the amounts deposited in fixed deposits and the in-.
vestments made are not Jess than the aggregate amounts of
liabilities to the depositors as on 30th June and 3 Jst December of
that year.
Explanation·:
For the purpose of this paragraph,
(a) "Aggregate amounts of liabilities" shall mean total amount
of
deposits received togetl1er with interest, premium, bo-
PEERLESS CO. v. R.B.l.[KASLIW AL, J.] 427
nus or other advantage by whatever
"name called accrued . A
on the amount of deposits according to the tenns of con
tract.
(b)
"approved securities" means; the securities in which the
Trustee is authorised to invest trust money by any
law. for
the time being in force
in India and bonds or fixed depos
its issued by any
corporation· established or constituted
under any Central or State enactments.
( c) "public sector banks" means, the State Bank of India, the
Subsidiary Banks and the corresponding new banks re
ferred to in Section 45(1)
of the Reserve Bank of India
Act, 1934
(2of1934).
(d)
"unencumbered approved securities" shall illclude the ap
proved securities lodged by the company with another
institution for advance or any other credit arrangements
to the extent to which such securities have not been drawn
against or availed of.
Paragraph (12) Every residuary non~banking company shall disclose
as liabilities in its books
of accounts and balance sheets the total amount
of deposits received together with interest, bonus, premium or other ad
vantage, accrued or payable to the depositors.
We would first deal with the legal objections raised on
behalf of the
Peerless and other companies. It has been submitted on behalf of the
Peerless and other companies that the directions of 1987 are ultra vires of
Sections 45J and 45K of the Reserve Bank of India Act, 1934. None of the
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said sections authorises the Reserve Bank to fiame any directions pre-F
scribing the manner
of investment of deposits received or the method of
accountancy to be followed or.the manner in which its balance-sheet and
books
of accounts are to be drawn up. It has been contended that Section
45J has .no manner of application in the present case. Section 45K (3) of
the Act on which reliance has been placed on behalf of the Re.serve Bank,
mere1y provides that the Reserve Bank may,
if it considers necessary in G
the public interest so to do, give directions to non-banking institutions
either generally or to any non-banking institutions
in particular, in respect
of any matters relating to or connected with receipts of deposits, including
the rate
of interest payable on such deposits and the purpose for which
deposits will be received. According to Sec. 45K (4)
if any non-banking
institution fails to comply with any direction given by the bank under sub-H
428 SUPREME COURT REPORTS· [1992] I_ S.C.R.
A s. (3) the Reserve Bank may prohibit the acceptance of deposits by that
non-banking institution. It is thus submitted that on a plain reading of
Sec.45K (3.) the Reserve Bank is only competent to frame the directions
regarding receipt of deposits and such power of direction does not extend
to providing the manner
in which deposits can be invested or the manner
in which the liabilities are to be disclosed in the balance-sheet or books of
B accounts of
th_e company. It is further submitted that the power under sub
s. (4) is to prohibit acceptance of deposits _and as such the .pennissible
field
of direction making is limited to receipt of deposits and
nQthing
more. The Reserve Bank of!ndia in framing the directions of 1987 which
is a subordinate piece
of legislation has clearly over-stepped the bounds of
the parent statute ofSec.45K
{3) of the Act.
c
· 11 is further argued that the Reserve Bank cannot contend that para
graphs 6 and 12 of the directions of 1987 are covered within the powers
conferred on the Reserve Bank under Sec. 45L (1) (b) of the Act. It is
submitted that the Reserve Bank had at no point
of time expressed its
intention to invoke its powers under
Sec. 45L. Even before the Division
D Bench of the Calcutta High Court the Reserve Bank did not rely on Sec.
45L as alleged source of its power to issue the impugned directions nor
the Reserve Bank referred to Sec. 45L in its pleadings before the High
Court. Wherever the Reserve Bank
of India wanted to invoke its power
under
Sec 45L of the Act, it has expressly mentioned that it was exercis
ing its pow_ers under Sec. 45L. In the case of Mn-banking financial com-
£ patties (Reserve Bank) directions 1977, or the miscellaneous non-banking
_companies (Reserve Bank) Directions, 1977 it has expressly said that it
was invoking its powers under sec.45L
of the Act, whereas in the case of
the impugned directions, the Reserve Bank has only referred to sections
45J and 45K
of the Act. The Reserve bank of India itself in the affidavit
F
G
H
. filed before the high Court had stated that the directions of 1987 were
framed after careful deliberations at the highest level and now it cannot
take the stand that the source
of its power in framing the impugned
directions was exercised under sec.45L
of the Act. It is further contended
that in order to invoke the powers under sec.45L
of the Act it has to state
that the Reserve Bank was satisfied for the purpose
of enabling it to
regulate the credit system
of the country to its advantage and it was
necessary to give such institutions directions relating to the conduct
of
business by financial
institUtion or institutions. In order to exercise its
powers under sec.45L
of the Act, it has to apply its mind for the purpose
of arriving at the statutorily required satisfaction. In fact, such recital is
necessary since such satisfaction is a pre-condition for the Reserve Bank
to exercise its powers under section 45L
of the Act. .
On the other hand it has been contended on behalf of the Reserve
•. >-..
PEERLESS CO. v. R.B.l.[KASL!W AL, J.J 429
Bank that the power
of the Reserve Bank to regulate deposit acceptance A
activities of non-banking and financial institutions under Chapter lllB of
the Act
cannot be disputed. The Reserve Bank has power to issue the
impugned directions under Sections 45J, 45K and 45L of the Act. The pith
and substance
of Para 6 of the directions of 1987 is
fo ensure that deposit$
received from the public are invested in a manner ·to secure the repayment
of the deposits. A deposit is, by definition, a sum of money received with · B.
a corresponding obligation to repay the same. Thus, the repayment of the
deposit
is an integral part of the transaction of a receipt of deposit.
It is
contended that the expression "receipt of deposit" must be. construed lib
erally, in the light of.the nattlre of the provisions as well as in the light of
the wide language used in the provision. It is also argued that even if the
impugned directions
of 1987 are not covered under the .powers conferred C
under
Sections 45J and 45K of the Act, those ate squarely covered by
Section 45L of the Act. It is submitted that various provisions under the
Act are enabling in nature and confer overlapping powers. Even
if there is
no recital
of
Sec. 45L, it would not be of much consequence, if such
exercise
of power can be related to
Sec. 45L of the Act.
We have considered the arguments advanced. by learned counsel for
the parties. Chapter IIIB laying down provisions relating to non-banking
institutions receiving deposits and financial institutions
was. inserted in the
Reserve Bank
of India Act, 1934, by virtue of Act 55
Qf 1963 w.e.f.
1.2.1964. Sections 45J, 45.K (3) & (4) and 45L I (b) relevant for our
D
purpose are given as under : E
Sec. 45.l.
"The Bank may, if it considers necessary in the public interest
so to do, by general or special order,-
( a) regulate or prohibit the issue by any non-banking institu
tion
of any prospectus or advertisement soliciting depos-
its of money from the public; and
·
(b) ,specify the conditions subject to which any such prospec
tus.or advertisement, if not prohibited, may be .issued.
Section 45K
(I)
(2)
(3) The Bank may, if it considers necessary in the public interest so
to do, give directions to non-banking institutions either generally or to any
F
G
H
430 SUPREME COURT REPORTS [1992] I S.C.R.
A non-banking institution or group of non-banking institutions in particular,
in respect o.f any matters relating to or connected with the receipt of
deposits, including the rates of interest payable on such deposits, and the
periods for which deposits may be received.
(4)
If any non-banking institution fails to comply with any direction
B given
by the Bank under sub-section (3), the Bank may prohibit the
ac
ceptance of deposits by that non-banking institution .
c
D
E
F
G
H
. Section 45L (1) If the bank is satisfied that for the purpose of
ena
. bling it to regulate the credit system of the country to its advantage it is
necessary so to do; it may -
(a)
{b) give to such institUtions either generally or to any such
institution in particular, directions relating to the conduct
of .
business by them or
by it as financial institutions or institution.
A combined reading
of the above provisions unmistakably goes to
show that the Reserve Bank
if considers necessary in the public interest so
to
do· can specify the conditions subject to which any prospectus or adver
tisement soliciting deposits of money from the public may be issued. It
can also give directions to non-banking institutions in respect of any
matters relating to or connected with the receipt
of deposits, including the
rates
of interest payable on such deposits; and the periods for which
deposits may be received. This latter power flows from sub-s.
(3) of
Sec.
45K of the Act. The Bank under this provision can give directions in
respect
of any matters relating to
or connected with the receipt of deposits
(emphasis added). In our view a very wide power is given to the Reserve
Bank
of India to issue directions in respect of any matters relating to or
cormected with the receipt
of deposits. It cannot be considered as a power
restricted or limited
to receipt of deposits as sought to be argued on behalf
of the companies that under this power the Reserve Bank would only be
competent to stipulate that deposits cannot
be received beyond a certain
limit or that the receipt
of deposits may be Jinked with the capital of the
company.
Such interpretation would be violating the language of Sec. 45K
(3) which furnishes a wide power to the Reserve Bank to give any direc
tions in respect of any matters relating to or connected with the receipt of
deposits. The Reserve Bank under this provision is entitled to give direc
tions with regard to the manner in which the deposits are to be invested
and also the manner
in which such deposits are to be disclosed in the
balance-sheet or books
of accounts of the company. The word 'any' quali-
_>--
PEERLESS CO. v. R.B.l.IKASUWAL, J.J 431
fying matters relating to or connected with the receipt of deposits in the A
above provision is of great significance and in our view the impugned
directions
of 1987 are fully covered under
Sec. 45K (3) of the Act, which
gives power to the Reserve Bank to issue such directions.
As
a proposition
of law we agree with the contention of the learned counsel for the Reserve
Bank that when
an authority takes action which is whithin its competence,
it cannot
be held to be invalid merely because it purports to to be made B
under a wrong provision, if it can be shown to be within its power under
any other provision. Learned counsel in this regard has placed reliance on
Indian
Aluminium Company etc. v. Kera/a State Electricity Board, [1976]
l S.C.R. 70.
In our view as already held above, the Reserve Bank was competent C
and authorised to issue the impugned directions of 1987, in exercise of
powers conferred under Section 45K (3) of the Act.
Having cleared the ground
of
ultra vires we must now turn to the
main challenge posed on behalf
of the Peerless and other companies and
employees. D
Mr. Harish
Salve made the leading arguments on behalf of the Re
serve Bank
of India. His main thrust of the argument was that the Reserve
Bank
of India had issued these directions of 1987 in order.to carry out
·
observations made by this Court in Peerless case (supra) and in the public
interest
of safeguarding the money of the depositors in such companies. E
The Reserve Bank considered it necessary that the interest
of millions of
small depositors of rural areas should be made safe and may not be
devoured by a mushroom of companies with no stake. According to Mr.
Salve it was not the intention of the Reserve Bank to put any restrictions
in the nlanner or conduct
of business to be done by such companies. But
the most important factor weighing in the
mind of the Reserve Bank was F
to safeguard the money
of the depositors. It was not the concern of the
Reserve Bank as to how and in what manner these companies would
regulate their expenses or would be able to conduct such business for
earning more profits. According to the Reserve Bank
of India these com
panies carmot be allowed to spend a moity
of deposits for meeting their .
own expenses. They should find out their own resources for meeting the
G
expenses. According to the Reserve Bank the rate of interest to be paid by
these companies to the depositors has been fixed as
IO per cent per annum.
They could easily invest such amount in botids issued by public sector
corporation and ean1 interest at the rate of
14 per cent per annu1n or.mo~e
and thereby earn a profit of 4 per cent arid regulate their expenses within
the limits
of such profits. It was submitted that
t6e propensity of the H
432 SUPREME COURT REPORTS (1992] I S.C.R.
A problem bas increased maliifold in. Yiew of the fact that the amount of
deposits .and investments bas gone to staggering heights worth several
thousand crores
of lower middle class persons living mostly in the rural
areas. A
bogey of employmeni hazards. of $everal thousand regular em
ployees and still a large number of agents working in the field cannot
deter the Re.ser~ Bank to lay down some directions which may act harshly
B and resulting in lessening of profits of such companies. It was also sub
mitted. that according to the affidavit submitted before this Hon'ble Court
on behalf of the Reserve Bank of India it has been stated that prior to
1987 directions. there were 747 i>uch companies which were conducting
deposit
scheme. At present they could classify only 392
such companies
as reqwred infc)rmation for classifying of the remaining companies had
C not been received Most of such companies have not designated their
banks
as it
reqilired under paragraph (6) of the directions and in most of
such. cases amounts invested in bank deposits and approved securities fall
much short of deposit liabilities. The· companies operating in these areas
also at times
become
untraeeable jn that a number of show cause notices
D
issued have been returned as "addres.see not known" etc. In some cases
those wllO have chosen to reply have given evasive replies. It has been
further stated in 1he affidavit that most of these companies did not comply
with the financial discipline sought to be imposed upon them and have
avoided and abhorred any scrutiny into .their accounts.
It has thus been submitted that to get over these difficulties, the
E directions ·of 1987 attempt to provide a steady, stable· identifiable and
· monitorable method by which the companies will be able to disclose all
their true liabilities
and also utilise the money raised from the depositors
for investment in safe identifiable and quantifiable securities instead of
investing
them in other ventures. This will ensure complete security to the
depositors at all times and will also make the accounts of the companies
F compehensible
and easy to monitor. As regards the formula laid down by
... ..
the High Court it bas been submitted that if a variable as against a fixed ·".Al
and definite percentage of·investment with respect to amounts collected
by way ofeach·instalment is permitted it would be impossible to find out
and
verify whether the amounts invested are in accordance with the direc-
tions
at any given point of time when there are thousands of certificates
G with different and varying maturity periods. In the circumstances, the
formula laid down by the High Court is self-defeating and also deprives
the depositor of the security envisaged under the directions.
H
It was also submitted on behalf of the Reserve Bank that it is an
admitted position that the business of RNBCs is to collect funds from the
public and invest the same in Government securities and bank deposits. In
........
PEERLESS CO. v. R.B.l.[KASLIW AL, J. I 433
the applicatioi1 ~orms and in the advertisement's issued by these com pa- A
nies it is expressly held out to the public .that their moneys are safe with
the banks and
in
Government securities. It is the very nature of their
business which makes it non-viable if they are to give fair return to the
depositors and private security
for the repayment of their money. The
scheme ofcoritrol
as provided in the directions of 1987 might be harsh but
the saine
is in conformity widi the assertions held out by these companies B
to the public at large, These directions subject the companies to proper
· discipline by monitoring their actions and such directions cannot be con
sidered as unreasonable'. The.reasonableness ofthe directions when looked
at fronf the point Of view of the depositors for whose. safeguard they have
been issued,
is beyond question. Return provided and the security to be
given through
·proper investment cannot be taulted on any ground. Thus c
what seems to be an.impossible situation for these companies is not due to
the impugnecfdirections but because of the nature of business itself. The
funds are C()lhicted at exhorbitant Costs and on that account it becomes
difficult for.the companies to give a fair return to ihe depositors . These
companies are not genuine investment companies. If they want to do
genuine investmen.t business .they can do so by choosing freely their in-D
vestment, but in that case Reserve Bank of India directions applicable to
such companies would permit them to accept deposits not exceeding
25 per cent of paid up capital and r~serve. The directions of 1987 had not
imposed any restriction
on the
right to carry on business but those direc
tions only place a restriction with respect to one of the modes of raising
reserves
i.e". through public deposits.
E
It has been further argued that the reasonableness _of the directions
has not to be looked into from the point of view of the· company to whom
any such restrictions will
be irksome and may therefore be
regarded· as
unreasonable. The framing of the directions are only regulatory in.nature
keeping in view the interest
of the depositors without unduly jeopardising F
the interest of the employees. Keeping this in mind it
has been provided
that the minimum return would be
at
I 0 per cent, though there are govt.
and public sector bonds which pay interest
at a much higher rate. Even
presently bank deposits and other company deposits give return varying
between
13 to 15 per cent. There is no limitation on the quantum of
deposits· with reference to the overall capital as shown in the case of G
companies governed by the companies (Acceptance of Deposits) Rules
1975, Non Banking Financial Companies (Reserve Bank) Directions, 1917
ruld Miscellaneous Non Banking Companies· (Reserve Bank ) Directions,
1977. The linking of deposits with capital as in the case of other regula
tions is a measure to secure the interest ·of the depositors namely e.g .
Companies (Acceptance
of Deposit) Rules, 1975, ensure that the assets H
434 SUPREME COURT REPORTS [1992] I S.C.R.
A are at least three times the deposits received. In view of the low or total r ·•
non-existent capital of the RNBCs, it was not possible to secure the de-
posits
in this manner. Instead, it has been provided that the entire liability
towards the depositors should
be invested and no part of the deposits be
utilised for payment of commission etc. or incurring other expenses. In
any event, even if, the directions do not
prescribe existence of owners
B capital as security, it does not imply that it is permissible to use the
deposits received to bridge the time gap between income and expenditure.
Merely because the directions
do not fix a ceiling on the rate of
commis
sions it does not imply that the Reserve Bank has granted its permission to
payment
of high commission or incurring of
large expenses on manage
ment etc. The RNBCs are free to incur such expenses and organize their
C business as they desire as long as the depositors are fully secured at all
times. The contention that the business.
of the
RNBCs will close down if
the directions of 1987. an; to be adhered to is not based on facts and
misconceived
in law. A perusal of the Directors' Report of
Peerless for
the years
1988, 1989 and
1990 clearly go to show that they did not
consider the company
in any financial difficulty and in fact paid larger
D dividends even after complying with the impugned directions of 1987.
'
It has thus been submitted that given a wide latitude in judging the
validity
of economic legislation on the touch stone of reasonableness, in
the absence of patent arbitrariness but having nexus with the public
objec
tive sought to be attained, the directions cannot be condemned as being
E violative
of Article 19(1) (g). The result of the contentions put forward on
behalf of
RNBCs would be that in the case of endowments repayable·
after, say 10 years, there will be nothing due and· payable in the first nine
years and as such there would
be no need of investing any sums for the
first nine years. The interpretation placed
by the respondent companies
upon the judgment
of the High
Court is that it is now open to them to
F determine as per their own peculiar estimate, what would be sufficient to
meet the liabilities towards the deposits
and according•v such amount
would
be their
"aggregate liability". According to the Peerless Company
if it deposits 75 per cent of the first year's subscription, it is adequate to
cover its liabilities to the depositors. On the other hand as per Timex
Company a deposit of only 50 per cent of the first year's subscription
G would
be adequate to cover its liabilities to the depositors. Whereas the
Favourite
Company contends that investment of 40 per cent of the first
year's subscription will
be adequate to cover the liabilities to the
deposi
tors. It has been submitted that according to well accepted accounting
practice where any sum· is received as a loan or as a deposit it has to be
shown as a liability together with accrued interest irrespective of when it
H is due. The amount contributed by the depositors being a capital receipt
and not a revenue receipt cannot under any circumstances
be shown in the
PEERLESS CO. v. R.B.!.IKASLIWAL, J.j 435
"·--f balance sheet otherwise than at its full value. Moreover, being a capital A
receipt, it cannot be credited to the profit and loss account since Part II of
Schedule VI to the Companies Act, 1956 requires that the amounts to be
shown
in the profit and loss account should be confined to the income and
expenditure
of the company. Thus, crediting a part of the first and
subse
quent year's deposit instalments to the profit and loss account and not
showing them fully as a liability in the balance sheet would be a contra-B
vention
of the provisions of the Companies Act.
It has been further submitted on behalf of the Reserve Bank that the
question which arises for consideration
is whether liability to the deposi-
tors can be calculated
on an actuarial basis. It may be noted that actuarial
basis
is normally adopted (a) in respect of items of income and expendi-C
ture, (b) where there
is a significant element of uncertainty. Thus, in so
far
as· the liability arising out of the repayment to the depositors of the
amount capitalised by
him is considered, the actuarial basis cannot be
adopted and this liability must always be stated at its full value.
The·
principle of actuarial valuation is inapposite for the business of RNBCs.
It has also been submitted that the formula laid down by the High Court D
about the quantum
of investments to be made by RNBCs is incapable of
effectively monitoring and hence the provisions made in the directions of
1987 regarding security to depositors would be rendered wholly illusory. Such impossibility in the monitoring has been demonstrated as follows:
(A) These companies do not
fix a definite but variable percentage of
investment with respect to amounts collected by way of each
instalment under the certificates
of deposits; e.g.
Peerless would
invest 75%
of the collections made out of !st instalment
(retain
ing and taking to P & L Ne, 25%) and 82% out of 2nd instal
ment and so on. At any given point of time, there will be
thousands of deposit certificates with varying maturity and the
amounts collected would
be an impossibility to find oui and
verify whether the amounts invested are
in accordance, with the
proportion fixed
)ly the companies with respect to each instal
ment. Regulatory authority would have to depend entirely on
these companies for doing its monitoring exercise.
(B) Each company fixes its own proportion of investment with re,
spect to each instalment based on the projected yield from its
investment; e.g. Favourite Finance Company claims that it needed
to invest only
40% of the amounts collected by way of Isl instal
ment claiming ihat the projected yield from its investment would
be 14.8%. This would compound the impossibility of monitor
ing further.
E
F
G
H
436 SUPREME COURT REPORTS (1992] 1 S.C.R.
A It has thus been argued that the fonnula laid doWll by the High court y--
is self-defeating and depriving altogether benefits of security provisions
given to depositors under the directions
of 1987.
·
Mr. Somnath Chatterjee, learned senior counsel appearing on behalf
of Peerless Company contended that the. Peerless being the largest RNBC
B in India having an impeccable record of public service decided to give
effect to the directions
of 19.87 as it wanted to avoid any
ci:infrontation
withReserve Bank and further not to give an impression of seeking to
avoid "regulatory control'', tried its best to comply with the said directions
w.e.f. 15tb May, 1987 till 31st.March, 1989. However,. from its working
results it appeared
bcfnafide to the Board of Directors of
Peerless that it
C was impossible to carry on its traditional business for any longer period
without incurring huge losses. The company as such decided
to approach
the High
Court for obtaining the benefit of judgment delivered in the
Timex case. Tlnd'eerless has only challenged a part of Paragraph 6 of the
directions
of
·1987 and the consequential direction contained in para 12
which shows that Peerless does not wish to remain outside of the regula-
D tory controls of Reserve Bank but challenges only those directions which
make the business totally unworkable. There has been no attempt on the
part of Peerless to carry on its business in a manner which may jeopardize
the Interest of.any depositor or which will not protect fully every paisa
deposited with Peerless at all points
of time.
No real complaint was made
by or on behalf of Reserve Bank as to any depositor of Peerless running a
E risk
of loss of any amount or that it has carried on or is carrying on the
business
in an undesirable manner. It has been submitted that
Peerless
should not be made to suffer for the illegality or improprieties, if any,
committed
by any. other
RNBC and neither Peerless nor its 14 lac field
agents, 3 thousand field officers and 4 thousand direct employees should
be made to suffer. The result of foilowing directions of 1987 would be
that all the above agents,. officers and: employ.ees of the Peerless could
loose their jobs and their family members will
be thrown on the streets.
The Peerless had abolished the provision
of forfeiture in all its schemes as
early as in 1986 that is even prior to coming into force of the directions of
1987. The Peerless has been compelled to challenge paragraphs 6 and 12
F
G
H
of the directions of 1987 since enforcement of these provisions would
result
in complete annihilation of the
undertaking of Peerless in the near
future.
It was further contended that
it is inherent in the business carried on
by Peerless and other similar
RNBCs that the working capital is generated
out
of the subscriptions received from the certificate holders.
Such busi
ness comprises
in collecting subscriptions from depositors either in lumpsum
j
y
PEERLESS CO. v .. R.B.l.[KASLIWAL, J.] 437
or
in instalments
:ll1d such deposits are paid back with the guaranteed A
accretions, bonus, i.nte~est etc. in tenns of the contract at the end· of the
stipulated tenn: Through this business such companies have .rendered
iµ-eat anq commendable service to.tl)e nation in mobilizing small Savings ·
and givin1fi boost to the movement of capital fonnation in the country.
Such coil\panies have placed at the disposal of Governmental institutions
including public sectl)r banks arid other financial institutions huge depos-.. B
. its which could not be eolleCted by the said .financial institutions them
selves or by.anybody in the organised sector: The method followed by the
companies in cat'ryirig oll'the afores;tid business is that a certain portion of
the .subscriptions received by it is transferred to the profit and loss ac
count, shown aS income,. and'.the satne is .used to defray inevitable work-
ing capital, reqiilrem~iits of ·ihe company, namely, payment of agent's C
commisSion; mll!lligement· expenses> ~taff S3laries and. other overheads.
However, Uie balanee of the subs9tjptions (excluding the appropriated
part) is. transfeiredto a fund each, year and the corpus of the fund is
invested in tum in interest bearing. investment The Peerless company
. iniiiallyused to transfer :approximately .95% of the first year's subscrip-
tions to the profinUid loss account and used. to invest the s11bscriptions D ·
received from ihe setiind year onwards: Ho~ever, at present, Peetless is
. appropriating 25% of the first year's subscription 'to the profit and loss
account and investing
the
'balance 75% in ·the manner and mode pre-·
scribed by paragraph 6. of the directions of 1987. It bas been contended
that the investment is planned in·such a manner.that at the .end of the
contractually stipidaied matUrity period or at any other point of time when · E
any sum of money rriay become contractually payable to a depositor, a
RNBC is always in a position to pay all its contractual dues to the certifi-
cate holder. There
is thus no threat to the safety of the
·dep.ositors money
inspite
of
the aforesaid transfer of a portion of the subscription received to
the profit and loss account showing it as income aiid utilising it for meet-
ing the working capital requirements. It was pointed out that Peerless had F ·
been .assessed to incom·e on the basis of above method of accounting and
no objection
has ever. been taken by the revenue authorities or by the
auditors
of
Peerless or even by R.B.I. before the issuance of the directions
of 1987. It was submitted that the Peerless was incorporated in the year
1932 when it used to carry on
life insurance business. It changed over to
the present fonn
of business
from 1956 and since then it has been carrying G
. .. '
on such business with the full knowledge of R.B.J. as well as other con-
cerned authorities
.. The R:B.I. never objected to the accounting system
followed
by the
Peerless. In view of the abolition of the forfeiture clause
the alleged risk
to the depositors has become totally non-existent. It was
further
argued that the R.B.l. framed regulatory measures in 1973 such
miscellaneous non-banking companies (Reserve Bank) Directions; 1973. H
. - . .
438 SUPREME COURT REPORTS [1992] 1 S.C.R.
A The Reserve Bank granted exception to Peerless from the provisions of
the said Directions of 1973, by an order dated 3rd December, 1973. The.
Favourite Small Investments Limited filed a writ petition challenging the
refusal
of Reserve Bank to grant exemption to them from the provisions of
the said
1973 Directions to granting such exemption to Peerless. In the
said writ petition the R.B.I. filed
an affidavit justifying the denial of
B exemption to Favourite Small Investments Ltd. and in the aforesaid affi
davit submitted
in detail the accounting procedure of
Peerless including
the fact that Peerless was transferring a portion of the subscriptions to the
profit and loss account
as income and it also certified that the said method
was a permissible business method and
by following the said method
Peer!ess would be in a position to pay all contractual dues of the certifi-
C cate holders at the end of the maturity period. Thus the said system of
accounting which is called an actuarial system of accounting was found
satisfactory
by the R.B.I. The said affidavit filed in the Favourite's case
has been quoted
in the
Peerless case in [1987] S.C.C 424, and the said
actuarial system
of accounting was not held as impermissible or against
any recognized method
of accounting.
'
D
It was also contended on behalf of the Peerless that the interest of
depositors is certainly an important an consideration but the interest of the
depositors
is not impaired in any manner whatsoever by the method of
accountancy now being followed by
Peerless and in fact by all similar
companies, namely, appropriation
of a part of the subscription to the
E profit and loss account and meeting the working capital requirements out
of the same. In respect of the above contention certain charts were also
produced during the course
of arguments and from such charts it was
sought to establish that except for the first two years the principal amount
paid by a subscriber
is always covered by matching investment. Further,
on the
date on which a deposit becomes contractually repayable, there is
F full coverage of such liability.
G
H
It was submitted on behalf of All India Peerless Field Officers Asso
ciation that the said association represents about
14 lac field workers.
These
14 lac persons are engaged by
Peerless on the basis of individual
contracts
of engagements and eam their livelihood solely by collecting
business for
Peerless. For collecting such business Peerless pays to them
commission at a contractual agreed percentage
on the value of business
collected. The said field officers have to meet all expenses for procuring
such business such as travelling expenses, boarding, lodging, office and
administrative expenses etc. out
of such commission. Field officers have
to undertake long tours and have
to travel into remote villages to reach the
small depositors.
It has been submitted that if the directions of 1987 are
upheld, the undertaking
of
Peerless will face inevitable closure and almost
'y--
PEERLESS CO. v. R.il.I.[KASLIW AL, J.] 439
·---.: 14 lac field officers will lose their only source of livelihood and will be A
virtually thrown on the streets. The field officers and their families will
face starvati.on and extreme penury in case the validity of such directions
is upheld. Thus any restrict.ion which would be prohibitive or which
would result
in closure of the undertaking of
Peerless would be against
publiGJ interest.
We have heard the argu.ments of learned counsel for the parties. It
may
be made clear at the outset that questions raised in these cases re
garding the validity
of paragraphs 6 and 12 of the directions of
1987
cannot be determined merely by taking' into consideration the working of
B
the financial soundness of the one company alone like Peerless but the
matter has to be·exatnined in a broader perspective of all RNBCs. We C
have to keep
in mind, while deciding the controversies raised in the argu
ments, such
RNBCs which are doing the same kind of business of taking
deposits and returning the same to the certificate holders after a gap of 7
to 10 years along with interest, bonus etc. In the affidavit submitted
before this Court on behalf of Reserve Bank of India it has been stated
that prior to
1987 directions, there were 747 such companies which were D
conducting this business under various deposit schemes. At. present they
could classify
392 such companies spread over across the entire country.
According to the above affidavit,
as on 3 lst March,
1990 in the eastern
zone out
of 185 companies, only 35 have filed the annual returns and out
of which only
30 have filed the balance sheet. Similarly, out of 140
companies in the northern zone only 28 have filed annual returns and 32 E
have filed balance
she.et. A perusal of the returns given by
51 of these
companies discloses that
35 companies have a negative net worth (i.e.
their losses far exceed their
share capital and reserves) which necessarily
means that they have not only wiped out the share capital and reserves but
their liabilities are far
in excess.
Only 16 companies have a positive net
worth including Peerless. It has been further pointed out ·in the affidavit F
that apart
from
Peerless the aggregate capital investment by 15 companies
is Rs.158 lacs only. As against this, the negative net worth of the 35
companies aggregated to Rs.3.6 crores. Despite large accumulated losses
(in some cases with meagre or nominal capital) these companies apart
. from Peerless, have realised deposits to the tune of Rs.86 crores. Apart
from the financial parameters most of these small companies are family G
concerns. Most
of such companies have not designated their banks as is
required under
Paragraph 6 of the directions and in most of such cases
amounts deposited
in banks and approved securities fall much
short of
deposit liabilities. It has also been pointed out in the affidavit that the
co1npanies c;>perating in these .areas also at times beco1ne untraceable in
that a number of show. cause notices issued have been returned as "ad-H
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440 SUPREME COURT RjlPORTS [1992] 1 S.C.R.
dressee not knoWll"etc. Thus we have to keep in mind the above mush
room of companies also which have set foot in this sort of business.
. ' ' . .
It would also be important to note that most of the depositors in such
companies belong to the rural .areas and who are persons belonging to
lower middle class, small agriculturists and small traders: pensioners etc.
These Companie$ advertise their schemes widely in beguiling terms. Through
such advertisements they lure the small savings of the poor ignorant vil
lagers through a special structure of agents, special agents, different kinds
of orgallisers and so on. The agents commission for the firSt years sub
scription is very high and which offers inceiitive to the agents on securing
a
fresh business and
a dis.incentive to collect silbscriptions of i;ubsequent
years. It is a matter of comm6n"experie11ce-an.d knowledge that most rural
folk particularly those belonging to the lower strata of society will not pay
their subscriptions regularly unless somebody takes the trouble of collect
ing their subscription with the same enthusiasm as may be shown in
enrolling the subscribers in the beginning. It is no doubt correct that these
companies do tap and collect the deposits from such areas where the
agents of public sector banks or public sector companies or instrumentalities
of the state are .unable to reach. Thus these companies mop up a large
amount of money for ultimately investing in the nationalised banks or
other Govt
owned corporations or companies. However, the Reserve
Bank considered the safety of the money
of the .depositors as the para
mount consideration in issuing the directions of 1987. It cannot be dis
puted that the interest of the employees as well as the field officers and
agents have also to be taken into consideration while deciding the rea
sonableness of the impugned directions. It may be further noted that in
the Reserve Bank of India v. Peerless Company case (supra) this Court
though came to the conclusion that the Endowment Certificate Scheme of
the Peerless company was outside the Prize Chit and Money Circulation
Schemes {Banning) Act, still it was observed that it would be open to the
Reserve Bank to take such steps as are open to them in law to regulate
sch~mes such as those run by the Peerless company to prevent exploita
tion of ignorant subscribers though care !)lust also be taken to protect the
thousands of employees. The Court expressed grave concern with regard
to the mushroom growth of 'financial investment companies' offering
staggeringly high rates of interests to depositors leading to the suspicion
whether
these companies are not speculative ventures floated to attract
unwary and credulous investors and capture their savings. It was clearly
pointed
out that if the Reserve Bank of India considers the
Peerless com
pany with 800 crores invested in Govt. securities, fixed deposits with
national banks etc. unsafe for depositors one wonders what they have to
say about the mushroom of non-banking companies which are accepting
(
y·-
. PEERLESS CO. v. R.B.l.[KASLIWAL, J,) 441
~--y deposits ~romising most unlikely returns and as such what action was A
proposed to be taken by the R:B.L to protect the investors. 'In the. above ·.·
· background the Reserve Bank came forward with the impugned directions
of 1~87.
Before examiningthe scope .and. effect of the impugned paragraphs
6 and .12 ofthe directions of 1987, .itis also:irnportant to note that Reserve .B
Bank of.India which is· bilnkerS'. bank is a creature of Statute. It had large
contlngentcif expert advice relating io matters affecting th~ economy of
the entire country and ~obod}' can (loubt the bonaficles of the . Reserve
,Bank in· issuing ihe impunged directions. 6f 1987. The':Reserve Bllllk
'plays an imporliuitrole in .the economy and financial affairs Of India and
one
of its. important
functions is to regulate the· banking. system in the C
country. It is the duty of.theResen:e:Biuikto ;siifeguard the.economy and
financial stability of the country. W,)iile examining the. power conferred
by Sec. 58Aofthe Companies Act, 1956 on .. the Central Govt. to prescribe
the limits upto which, the.manner
in
which and the conditions subject to
which deposits may' be invited cir accepted by non banking companies,
this Court in Delhi Cloth and General Mills, etc. v. Union of India, etc., D
[1983].3 S.C.R, 438 observed as under:
"Mischief was known and the regulatory measure was intro
duced to remedy the mischief. The conditions which can be
prescribed
to effectuate this purpose must a fortiori, to be
valid, fairly and reasonably, relate to checkmate the abuse
of E
juggling with the depositors/investors' hard earned money by
the corporate sector and to confer upon them a
m·easure of
protection namely availability of liquid assets to meet the obli
gation of repayment of dep'osit which is implicit in acceptanee
of deposit. Can it. be said that the conditions prescribed by the
Deposit Rules are
so irrelevant or have no reasonable nexus to
the objects
sought . to be achieved· as to be arbitrary? The
answer
is emphatically in the negative. Even at the
cost of
repetition, it can be stated with confidence that the rules which.
prescribed conditions subject to which deposits can
be invited . and accepted do operate to extend a measure of protection
against the notorious abuses
of ec.onomic power by the
corpo
F
G
rate se.ctor, to the detriment of depositors/investors, a segment
of.the society which can be appropriately described as weaker. '·-..._ -
in relation to the mighty corporation. One need not go so far
with Ralph Nadar
in 'America Incorporated' to establish that
political institutions may
fail to arrest the control this
ever
widening power of corporations. And can one wish away the H
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442
SUPREME COURT REPORTS [ J 992] I S.C.R.
degree of sickness in private sector companies? To the extent
companies develop sickness, in direct proportion the control
lers
of such companies become healthy. In a welfare state, 'it
·is the constitutional obligation of the state to protect socially
and economically weaker segments
of the society against the
exploitation
by corporations. We therefore, see no merit in the
submission that the conditions prescribed bear no relevance to
the object or the purpose for which the power was conferred
under Sec.58A on the
Central Government."
The function of the Court is to see that lawful authority is not
abused but not to appropriate
to itself the task entrusted to that authority.
It is well settled that a public body invested with statutory powers must
take care not to exceed or abuse
its power. It must keep within the limits
of ihe authority committed to it. It must act in good faith and it must aci
reasonably. Courts are not to interfere with economic policy which is the
function
of experts. It is not the function of the
Courts to sit in Judgment
over matters
of economic policy and it must necessarily be left to the
expert bodies.
In such matters even experts can seriously and doubtlessly
differ.
Courts cannot be expected to decide them without even the aid of
experts.
The main grievance raised on behalf
of respondent companies is that
if the provisions of paragraphs 6 and 12 of the directions of 1987 are
complied with, the companies will
be left without any fund to meet their
working capital.
It would be impossible to run the business without a
working capital and
to meet even reasonable expenses incurred for pay
ment
of agents commission, management expenses and other overhead
expenses. During the course
of hearing the counsel for the companies had
relied on some charts to show the unworkability and unreasonableness
of
the impugned paragraphs 6 and 12 of the directions. It was also pointed
out that the arguments made on behalf
of the Reserve Bank overlooked
the fact that
in case of investments in long term schemes such as Indira
Vikas
Patra and Kisan Vikas Patra the companies will not be able to
utilise its return from such investments before the end
of the minimum
period for which these schemes operate. The respondent companies will
G thus be left without any income during the period of operation of such
schemes and cannot
meet_ its working capital requirements. It has been
submitted that the directions
of 1987 really amount to prohibition of the
business in
a commercial sense without reasonable basis and are thus
violative
of Art. l9(l)(g) of the Constitution. In support of the above
contention reliance has been placed
on Mohammad
Yasin v. The Town
H Area Committee, .Ja/a/tlbad and another. [1952] SCR 572; Premier Auto-
-I
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PEERLESS CO. v. R.B.l.[KASLIW AL, J.] 443
mobiles Ltd. and anothers v. Union ~f India, AIR 1972 SC 1690 and on A
Shree Meenakshi Mills Ltd. v. Union of India, AIR 1974 SC 366. It has
also
been. contended that it is now well settled by plethora of judicial
pronouncements that
the restrictions on any business caused by regula
tions should not be more than what would be necessary in the interest of
the general public and such restrictions should not overreach the scope of
the objects achieved by the regulations. B
The contention on behalf of the Reserve Bank is that the directions
have been made
in. public interest of safeguarding the interest of millions
of depositors and the Reserve Bank is not concerned and while doing so it
was rightly thought necessary by the Reserve Bank that the companies
cannot
be permitted to incur the expenses out of the corpus of the deposi-C
tors money.
Tfie business carried on by the companies is that of only a
middleman or
of commission
ag~nts and it is for the companies to restruc-
ture their organization by curtailing
its expenses. If
~uch middlemen or
brokers are not able to earn a large profit
as was done
before the enforce
ment
of the impugned directions, it lies with the companies to
·sontinue or
not such business when the margin
of profit is curtailed. These companies
· D
want to
do the business without having any stake of their own. The
companies doing such
business cannot be subjected to the scheme of
control applied to other financial and non-financial companies for the
simple reason that they have no capital and their schemes are for a period
much longer than three years. After the decision
of !he Supreme Court in
Peerless case these directions of 1987 were issued after mature considera-E
tion with the help and advice
of experts.
Paragraph 6
of the impugned directions according to the Reserve
Bank lays down provisions
for security of depositors. It prescribes the
mode
of investment of funds collected by the companies.
It cannot be
disputed that while collecting deposits the companies 'clearly hold out to F
the members
of the public that the moneys so collected by them shall be
invested in Government securities or kept deposited with the banks and they also assure the dep~sitors that their moneys are safe and secure. On
the basis of such representations and on the strength of exaggerated and
misleading advertisements these companies collect huge amounts
of de-'
posits from a large number
of small, poor and uninformed depositors and G
that too in such investment spread over a long period. The contention on
behalf of the Reserve Bank of
India is that in the above context these
companies carry on their activities wholly with the funds provided
by the
public by way
of deposits and hardly have any capital of their own.
In
these circumstances it has been urged on behalf of the Reserve Bank that
the provisions made
in paragraph 6 of, the impugned
dirfftions are abso-H
444 SUPREME COURT REPORTS [1992] I S.C.R.
A lutely reasonable and are for ensuring repayment of deposits. It has been
submitted that
it is common knowledge that small depositors cannot have
recourse to courts for recovering their amounts
if the companies do not
·
repay the deposits. The direction in paragraph 6 enjoins on these compa
nies to deposit
in fixed deposits with public sector banks or unencumbered
approved securities or in other investments, a
sum which shall not, at the
B
closir of business on 3 lst December, 1987 and thereafter at the end of
each half year i.e. 30th June and 31st December not less than the aggre
gate amounts
of the liabilities to the depositors whether or not such amounts
have become payable. Thus according
to the above provision whole of the
aggregate amounts
of the liabilities to the depositors whether or not such
amounts have become repayable,
is required to be deposited or invested.
C I 0%. of such amount is required to be deposited in public sector banks and
70% in approved securities and 20% has been allowed to be invested by
the company according
to its own choice.
In order to understand the rigour of the directions laid down in
paragraph '6', it would be necessary tb understand the scope of other
D directions as well.
Paragraph 4 of the directions lays down that the deposit
shall not be accepted for a period
of less than 12 months or more. than
120
months i.e. one year to ten years from the date of receipt of such
deposits. The normal standard applied to non financial and financial
companies is that they crumot accept deposits for a period of more than
36 months (except housing finance company). Thus the companies before
E
us have been pennitted to conduct their schemes extending over to a long
period upto
120 months. This is a special kind of concession provided to
the companies
of
the kind before us.
Paragraph 5 of the directions relates to the minimum rate of return
fixed at 10% per annum for a deposit with a maturity of IO years. It is a
F matter
of common knowledge that in the present times even the public
sector corporations and banks and other financial and non-financial com
panies pay interest at much more higher rates ranging
from 14 to 18%.
llrns accordi11g to the above scheme the respondent companies and the
others doing such business can easily earn a profit
of 4 to 5% on their
investments. In case
of a request of the depositors for repayment of the
G deposit
befo.re maturity then the amount payable by the compru1y by way
of interest etc., shall be 2% less than what could have been ordinarily paid
by the company by way of interest if the deposit had run the full contrac
tual period. However, the question
of repayment before maturity or after
how many years will depend entirely
on the terms and conditions of the
contract
of such d_eposit.
Paragraph t2 of the directions of 1987 enjoins
1-1 upon the company to disclose as liabilities in its books of accounts and
-~
,
PEERLESS CO. v. R.B.l.[KASLIWAL, J.] 445
balance sheets the total amount of deposits received together with interest, A
bonus, premium or other advantage, accrued or payable to the depositors.
Under Clause (a) to the explanation to clause 3 of paragraph '6' "Aggre-
gate Amounts of Liabilities" shall mean total amount of deposits received
together with interest, premium, bonus or other advantage
by whatever
name called, accrued on the amount
of deposits according to the terms of
contract. Thus the company is required to deposit or invest the aggregate B
amounts of its liabilities having accrued on the amount of deposits accord-
ing to the terms
of contract. Without going into the figures shown in the
various charts, it is clear that
if the directions contained in paragraphs 6
and.
12 of the directions of 1987 are to be carried
out, the companies are
not left to utilise any amount out
of the deposits as working capital to
meet the expenses. In our view the Reserve Bank is right in taking the C
stand that
if these companies want to do their.business, they should invest
their own working capital and find such resources elsewhere with which
the Reserve Bank has no concern.
If we look at the Annual Report and
Accounts
of
Peerless for the years 1988, 1989 and 1990 it.is clear that it
had conducted its business following the impugned directions of 1987 and
still
had earned substantial profits in these years. It is clear that
Peerless D
is a company having established as back as in 1932 and had substantial
funds to invest the entire amount
of deposits and had met the expenses out
of its
accumulated profits of the past years. This shows that the business
can
be run and profit can be earned even after complying with the im
pugned directions
of 1987 issued by the Reserve Bank. It is not the
concern
of this court to find out as. to whether actuarial method of E
accounting or any other method would
be feasible or possible to adopt
by the companies while carrying out the conditions contained
in para
graphs 6 and
12 of the directions of 1987. The companies are free to
adopt any mode of accounting permissible under the law but it is certain
that they will have to follow the entire terms
and conditions contained
in the impugned directions of 1987 including those contained in para-F
graphs 6
·and 12. It is not the function of the Court to amend and lay
down some other directions and the
High
Court was totally wrong in
doing so. The function of the Court is not to advise in matters relating to
financial and economic policies for which bodies like Reserve Bank are
fully competent: The Court can only strike down some or entire direc
tions issued by the Reserve Bank in case the Court is satisfied that the G
directions were wholly unreasonable or violative of any provisions of the
Constitution or any Statute. It would be hazardous and .risky for the
courts to tread
an unknown path and should leave such task to the expert
bodies. This court has repeatedly said that matters
of economic policy
ought to
be left to the Government. While dealing with the validity of an
order passed on September
30, 1977 fixing a retail price of mustard oil not H
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446 SUPREME COURT REPORTS [1992] I S.C.R.
exceeding Rs. I 0 per kilogram in exercise of powers conferred by Section
3 of the Essential Commodities Act, a Bench of 7 Judges of this Court in
Mis Prag Ice & Oil Mills and another v. Union of India and Nav Bharat
Oil Mills and another
v.
Union of India, [1978] 3 SCC 459 observed as
under:
"We have listened to long arguments directed at showing us
that producers and sellers of oil in various parts of the country
will suffer
so that they would give up producing or dealing in
mustard oil. It was urged that this would, quite naturally, have
its repercussions
on
~onsumers for whom mustard oil will be
come even more scarce than ever ultimately. We do not think
that it
is the function of this
Court or of any Court to sit in
judgment over such matters of economic policy as must neces
sarily be left to the Goverrunent of the day to decide. Many of
them, as a measure of price fixation must necessarily be, are
matters
of prediction of ultimate results on which even
experts
can seriously err and doubtlessly by differ. Courts can cer
tainly not be expected to decide them without even the aid of
experts".
Jn Shri Sitaram Sugar Company Limited .and another v. Union q(
India & others with UP .• \'tate Sugar C017Joration Ltd., and another v.
Union of India & Others, [1990] 3 SCC 223 this Court observed as under:
"Judicial review is not concerned with matters of economic
policy. The Court does not substitute its judgment for that of
the legislature or its agents as to matters within the province of
either. The Court does not supplant the "feel of expert" by its
own views. When the legislature acts within the sphere ·of its
authority and delegates power
to an agent, it may empower the ag·ent to make findings of fact which are conclusive provided
such findings satisfy the test
of reasonableness. In all such
cases, judicial inquiry
is confined to the question whether the
findings
of fact are reasonably on evidence and whether such
findings are consistent with the laws
of the land.
In
RX.Garg v. Union q(lndia & others, etc. etc., [1981] 4 SCC 675
at p.690 a Constitution Bench of this Court observed as under:
"Another rule of equal importance is that laws relating to eco
nomic 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,
be-
f
PEERLESS CO. v. R.Bl.[KASLIWAL, J.] 447
cause ithas to deal with complex problems which do not admit A
of solution through any doctrinaire or strait-jacket formula and
this
is particularly true in case of legislation dealing with eco
nomic matters, where, having regard
to-the nature of the prob-
. lems 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 legislative judgment in B
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.
Doud where Frankfurter, 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 af
firmative responsibility. The courts have only the power to
destroy, not
to reconstruct. When these are added to the com
plexity
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 limi
tation can be seen to
be the path to judicial wisdom and insti
tutional prestige and
stability".
It may also be noted that it is not possible. for the Court to determine
c
D
as to how much percentage of deposit of first instalment should be al
lowed towards expenses which may consist
of commission to agents, of-E
fice expenses etc. Even amongst the three
companies--viz. Peerless,
Timex and Favourite, there is a difference in this regard. According to
the Peerless 25%, Timex 50% and Favorite 60% of the deposits of the first
instalment would be necessary for generating the working capita] for 1neeting
the geniune expenses. Thus it would depend from company to company
based on various factors such as paid-up-capital, percentage
of commis-F
sion paid to the agents, rate
of interest paid to the depositors, period of
maturity for
repayment, office expenses and various other factors neces-
sary to mop up working capital out of the depositors money. We camwt
ignore the possibility of persons having no stake of their own starting such
business and after collecting huge deposits
from the investors belonging to
the poor and weaker sections
of the society residing in rural areas, and
to G
stop such business after a
few years and thus devouring the hard earned
money
of the small investors. It cannot be lost sight that in such kind of
business, the agents always take interest in finding new depositors be
cause they get a high rate
of commission out of the first instalment, but
they do not have same enthusiasm
in respect of deposit of subsequent
instalments. In these circumstances,
if the Reserve Bank has issued the H
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448 SUPREME COURT REPORTS [1992] 1 S.C.R.
directions of 1987 to safeguard the larger interest of the public and small
depositors
it cannot be said that the directions are so unreasonable as to be
declared constitutionally invalid.
It has been vehemently contended before us on behalf of the
Peer
less employees and field agents that in case the impugned directions are
not struck down, the Peerless will have to close down its business and
several thousands
of employees and their family and several lakhs of field
agents would
be thrown on the street and left with no employment. We
do not find any force
in the above contention.
So far as Peerless is con
cerned there
is no possibility of its closing down
·Such business. It has
already large accumulated funds collected by making profits ;n the past
several years. Thus it has enough working capital
in order to meet the
expenses.
We are not impressed with the argument of Mr.
Somnath
Chatterjee, Learned Senior Advocate for the Peerless that after some years
the Peerless will have to close down its business if directions contained in
paragraphs 6 and
12 are to be followed. The w.orking capital is not
needed every year
as it can be rotated after having invested once. If the
entire amount
of the subscribers is deposited or invested in the proportion
of
10% in public sector banks, 70% in approved securities and 20% in
other investments, such amounts will also start earning interest which can
be added and adjusted while depositing or investing .the subsequent years
of deposits of the subscribers. In any case it .lies with the new entrepre
neurs while entering such field
of business to make arrangement of their
own resources
for working capital and for meeting the expenses and they
cannot insist
in utilising the money of the depositors for this purpose.
So
flfr as the companies already in this field they must have earned profits in
the past years which can be utilised as their working capital. It is impor
tant to note that the impugned directions
of 1987 have been made applica
ble
from 15th May, 1987 prospectively and not retrospectively. Thus
m1der these directions the question of depositing the entire amount of
subscriptions would only apply to the deposits made after .15th May,
1987.
We may also observe that the impugned directions of 1987 as well
as any other directions issued from time to time by the Reserve Bank
relating to economic or financial policy are never
so sacrosanct that the
same cannot
be changed. Even the financial budget for every year de
pends on the economic
and financial policy of the Govemment existing at
the relevant time.
So far as the impugned directions are concemed if it is
found in future that the same are not workable or working against the
public interest,
the Reserve Bank is always free to change its policy and
scrap or amend
the directions as and when necessary. We have no doubt
"'1
PEERLESS CO. v. R.B.l.[RAMASWAMY, J.j 449
,.---r that if in times to come the Reserve Bank feels that business of the kind A
run at present by the Peerless and other companies, in terms of the direc
tions
of 1987 are not yielding the result as envisaged by the Reserve
Bank, it
will always be prepared to consider any new proposals which
'
may be conducive both in the interest of the large multitude of the inves-
tors as well as the employees
of such companies. Mr. Shanti Bhushan,
Learned Senior Counsel
appearing on behalf of the Reserve Bank.made a B
candid statement on behalf
of the Reserve Bank that the Reserve Bank
would always be prepared to consider any new proposal which would
subserve the public interest.
In the result I set aside the orders of the High Court and allow the
appeals arising out
of
SLP Nos. 6930-30A of 1991, 7140 of 1991 and C
3676 of 1991 filed by the Reserve Bank of India and dismiss the writ
petition No.677of1991. No order as to costs.
K. RAMASWAMY, J. While respectfully agreeing with my learned
brother since the
issues· bear far reaching seminal importance, I propose to
express my views as well. D
This Court in Reserve Bank qf India etc. v .. Peerless General Fi
nance and Investment Co. Ltd. & Ors. etc., [ 1987] 2 SCR 1 for short
'first Peerless case' while holding that Prize Chits and Money Circulation
Schemes (Banning) Act, 1978 does not attract "Recurring Deposits Schemes",
pointed out that the schemes harshly operate against the poor sections of E
the society who require security and protection; urgent action appeared to
be called for and was imperative to protect the public. and emphasized to
evolve
fool proof scheme to prevent
fraud being played upon persons not
conversant with practices
of the financial enterprises who pose themselves
as benefactors
of the people. In pursuance thereof the appellant, Reserve
Bank
of India, for short 'RBI' issued Residuary Non-Banking Companies F
(Reserve Bank) Directions,
1987 for short 'the Directions'. The short sift
with avid
eye into the relevant provisions of the Reserve Bank of India
Act
2 of 1934 for short 'the Act' and "the directions" would enable us to
come to grips with the scope
of the scheme of the directions, its purpose
and operation. Chapter lll(B)
of the Act deals with the power of RBI to
regulate non-banking institutions receiving deposits.
Section 45(1) (bb) G
defines deposit includes and shall be deemed always to have included
"any receipt or money by way of deposit or loan or in any other form but
does not include ... " exception~ are not relevant" and hence are omitted.
Section 45( l)(c) defines 'financial institution' to mean any non-banking
institution \lhich carries on its business, or part of its business, in any of
the following activities; clauses (i) to (v) are m;..itted, clause (vi) collect-H
450 SUPREME COURT REPORTS [1992] 1 S.C.R.
A ing for any purpose of any scheme or arrangement by whatever name
called, monies
in lump-sum or otherwise by way of subscription ... or in
any other manner
by awarding prizes or gifts .. , whether in cash or kind or
disbursing monies in any other way
to persons from whom monies are
collected or to any other persons but does not include ... the exclusions are
not relevant and hence omitted.
Section 451 empowers that RBI may, if it
B considers necessary
in the public interest so to do, by general or
speci.al
order, (a) regulate or prohibit the issue by any non-banking institution of
any prospectus or advertisement soliciting deposits of money from the
public; and (b) specify the conditions, subject
to which any such prospec
tus or advertisement,
if not prohibited, may be issued.
Section 45K em
powers the RBI to collect information from non-banking institution as to
C deposit and to give directions that every non-banking institution shall
furnish to the Bank,
in such fonn, at such intervals and within such time,
such statements, information or particulars relating to or connected with
deposits received
by the non-banking institution, as may be specified by
RBI by general or special order including the rates of interest and other
terms and conditions on which they are received.
Under sub-section (3)
D thereof the RBI is entitled to issue
in the public interest directions to
non
banking institution in respect of any matter relating to or connected with
the receipt
of deposits including the rates of interest payable on such
deposits and the periods for which deposits may
be received. The use of
the adjective 'any' matter relating to or connected with the receipt of
deposits is wide and comprehensive to empower the
RBI to issue direc-,
E tions in cormection therewith or relating to the receipt of deposits. But
exercise of power is hedged with and should be "in the public interest."
F
G
Section 45L provides that if the RBI is satisfied that for the purpose
of enabling it "to regulate the credit system of the country to its advantage
it is necessary
so to
.do"; it may give to such institutions either genetally
or to any such institution, in particular, "directions relating to the conduct
of business" by them or by it as financial institution or institutions includ
ing furnishing of information of particulars "relating to paid up capital,
reserves or other liabilities", the "invest1nents" whether "in the Govern
ment securities" or "otherwise", the persons to whom, and the purposes
and periods for which; finance is provided "the terms and conditions".
including "the rates of interest", on which it is provided. Section 45Q
-provides that the provisions of this chapter shall have effect "notwith
standing anything inconsistent therewith contained in any other law" for
the time being
in force or any instrument having effect by virtue of any
such
Jaw.
H
~
The directions became operative from May 15, 1987. They would
apply
to every Residuary Non-Banking
Company for short 'R.N.B.C.'
J•
/
PEERLESS CO. v. R.B.l.[RAMASWAMY, J.] 451
which receive any deposit scheme in lump-sum or in instalment by way of A
contribution or subscription or by sale of units of certificates or other
instruments
or
"in any other manner" vide Clause JI of the definit.ion.
Clause III(A) defines deposits as defined
in s.45(1) (bb) of the Act. Para
graph 4 regulates receipt
of deposits for a period not less than 12
months
and not more than 120 months from the first day of the receipt of the
deposit. Paragraph 5 prescribes minimum rate
of return of
IO per cent per B
annum (to be compounded annually) on the amount deposited. The pro-
viso empowers R.N.B.C. at the request
of the depositor to make
repay"
ment of the deposit, after the expiry of a period ofone year from the date
of the deposit but before the expiry of the period the deposit with two per
cent reduced rate
of interest from I
0% interest. Paragraph 6, the heart of
the directions consists of three sub-paragraphs with explanations. The C
marginal note expresses "security for depositors". Sub-paragraph (I) thereof
provides that
on and from May 15,1987 every R.N.B.C. shall deposit and
keep deposited
in fixed deposits with public sector banks or invest and
keep invested
in unencumbered approved securities (such securities being
valued at their market value for the time being), or
in other investments,
which
in the opinion of the company are safe, a sum which shall not, at D.
the close of business on 31st December, 1987 and thereafter at the end of
each half year that is,
30th June and 31st December be less than the
aggregate amounts
of the liabilities to the depositors whether or not such
amounts have become payable. The proviso specifies that the sum
so
deposited or invested (a) not less than
IO per cent shall be in fixed depos-
its with any
of the public sector banks (b) not less than
70 per cent shall E
be
in approved securities; and (
c) not more than 20 per cent or I 0 times
the net owned funds
of the company, whicheve,r amount is less, shall be in
other
·investl)lents.. Provided that such investments shall be with the ap
proval
of the Board of Directors of the Company, the explanation
"Net
Owned funds" shall mean the aggregate of the paid-up-capital and free
reserves as appearing
in the latest audited balance sheet of the company as F
reduced by the amount
of accumulated balance of loss, deferred revenue
expenditure and other intangible assets,
if any, as disclosed in the said
balance sheet. Sub-paragraph (2) enjoins the R.N.B.C. to entrust to one
of
the public
sectbrbanks designated in that behalf. Deposits and securities
referred to
in clauses (a) and (b) of the proviso to sub-paragraph (I) to be · held by such designated bank is for the benefit of the depositors. Such G
securities and depositors shall not be withdrawn by the R.N.B.C. or
otherwise dealt with, except for repayment to the depositors. Sub-para
graph (3) obligates it
to furnish to the R.B.I. within
30 days from the close
of business on 3 I st December, I 987 and thereafter at the end of each half
year i.e., as
on
30th June and 3 lst December, a certificate from its audi-
tors, being member
of institute of Chartered Accountants, to the effect H
A
B
c
D
E
F
G
H
452
SUPREME COURT REPORTS [1992] 1 S.C.R.
that the amounts deposited in fixed deposits and the investments made are
not less than "the aggregate amounts of liabilities to the depositors" as 011
30th June and 3 lst December of that year. Explanation thereto makes
explicit what the "aggregate amount of liabilities"; "approved securities":
and "public sector banks" and "unencumbered approved securities" are
meant to be. the details
of which are not necessary for the purpose of this
case.
Paragraph 7 abolishes the power of the R.N.B.C. of forfeiture of
deposits; paragraph 8 prescribes particulars to be mentioned in the fonn
soliciting deposits; paragraph 9 enjoins issuance
of the receipts to the
depositors and paragraph I
0 obligates to maintain the register with par
ticulars
of depositors mentioned therein.
Paragraph 11 enjoins its Board
of Directors to furnish the infonnation in their report as envisaged therein.
Paragraph 12 which is also material for the purpose of this case provides
that every R.N.B.C. shall disclose as liabilities in its books of accounts
and balance sheets. the total an1ount of deposits received together with
interest, bonus, pre1nium or other advantage, accrued or payable 10 the
depositors. Paragraph 13 enjoins to supply to R.B.I. copies of the balance
sheets and accounts together with Directors' report. Paragraph 14 obli
gates the co1npany to sub1nit returns to the R.B.I. in the 1nanner envisaged
thereunder. R.N.B .. C has to submit balance sheet. returns etc. to the
depart1nent of the Financial Co1npanies as per paragraph 15. Paragraph
16 obligates R.N.B.C. to comply with the requirement of the non-banking
financial co1npanies and 1niscellaneous non-banking con1panies (Adver
tisement) Rules, 1977 etc. and actual rate of interest etc. to the depositor.
Paragraph 17 applies to the prospective R.N.B.C. to furnish infonnation in
Schedule C. Paragraph 18 accords transitory power and paragraph 19
e1npowers the R.B.I., if it considers necessary to avoid any hardship or for
any other just and sufficient reasons, to grant extensions of titne to co111-
ply with or exempt , any company or class of companies, from all or a1;y
of the provisions of the directions either generally or for ai1y specified
period, subject to such conditions as the
RBI may impose and paragraph 20 excludes the applicability of paragraph 19 of the Non-Banking Finan
cial Companies (Reserve Bank) Directions, 1977.
The High Court declared paragraphs 6 and 12 to be 11/tru vires of
Art.19( 1 )(g) and 14 of the Constitution holding that though the directions
do not expressly prohibit the business
of receiving any deposit under any sche1ne or arrange1nent in lun1p-su1n or in installnent by way of contribu
tion or subscription by R.N.B.C.in effect the operation of the directions
inhibit the existing business and prohibits the future con1panies to corne
into being. As seen the public purpose of the directions is to secure for
the depositors, return
of the amounts payable at maturity together with interest, bonus. pren1iu1n or any other advantage accrued or payable to the
y •.
>-.
-~.
PEERLESS CO. v. R.B.l.[RAMASWAMY, J.] 453
depoiitors. To achieve that object every R.N.B.C. is enjomed to deposit A
and keep deposited in fixed deposit and invest and keep invested in
unencumbered approved securities a sum which shall not, at the close
of
each half year, be less than the aggregate amount of the liability to the
depositors whether or not such amount has become payable. The .object,
thereby, is to prohibit deployment
of funds by R.N.B.C. in any other
maimer which would work detrimental to the interest of the depositors. B
The question emerges whether paragraphs 6 and
12 are
11/1ra vires of
Articles 19(1)(g) and 14 of the Constitution. Article l9(1)(g) provides
fundamental rights to all citizens to carry on·miy occupation. trade ·or
business. Cl. 6 thereof empowers the State to make any law imposing, in
the interest of the general public, reasonable restrictions on the ex.ercise of
the said rights. Wherever a statute is challenged as violative the funda
mental rights, its real effect or operation
on
th~ Junifamental rights is of
primary importance. It is the duty of the cciurt to be watchful to protect
the constitutional rights of a citizen as against any encroachn1ent gradu-
ally or stealtl1ily thereon. When a law has imposed restrictions on the
fundamental rights, what the court has to examine is the substance
of the
legislation without being beguiled by the
mere appearance of the legisla
tion. The Legislature cannot disobey the constitutional 1nandate by e111-
ploying an indirect method. The court must consider not merely the
purpose of the law but also the means how it is sought to be secured or
how it is to
be administered. The object of the legislation is not conclu-
sive as to the validity
of the legislation. This does not mean the constitu
tionality
of the law shall be detennined with reference to the manner in
which it has actually been administered or operated or probably been
administered or operated
by those
wl10 are charged with its implementa
tion. The court cannot question the wisdom, the need or desirability
of
the regulation. The state can regulate the exercise of the fundamental
right to save the public
from a substantive evil. The existence of the evil
.. as well as the 1neans adopted to check it are the matters for the legislative
judgment. But the court is entitled to consider whether the degree and
1node of the regulation whether is in excess of the require1nent or is
ilnposed in any arbitrary 1nanner. The court has to see \vhether the 1neas-
ure adopted is relevant or appropriate 10 the power exercised by the au
thority or whether over stepped the limits
of social legislation.
Smaller
inroads 1nay lead to larger inroads and ultitnately result in total prohibi
tion by indirect method. If it directly transgresses or substantially and
inevitably effects the fundamental right,
it becomes unconstitutional, but
not where the i1npact is only re1notely possibly or incidental. The court 1nust lift the veil of the fonn and appearance to discover the true character
.and the nature of the legislation. and every endeavour should be n1ade to
have the efficacy of funda1nental right 1naintained and the legislature is
c
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F
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H
454 SUPREME COURT REPORTS [1992] I S.C.R.
A not invested with unbounded power. The court has, therefore, always to
guard against the gradual encroachments and strike down a restriction as
soon as it reaches that magnitude
of total annihilation of the right.
However, there
is presumption of constitutionality of every statute
and its validity is not to
be determined by artificial standards. The court
B has to examine with some strictness the substance of the legislation to
fincl
what actually and really the legislature has done. The court would not be
over persuaded
by the mere presence of the legislation. In adjudging the
reasonableness
of the law, the court will necessarily ask the question
whether the measure or scheme is just, fair, reasonable and appropriate or
is it unreasonable, unnecessary and arbitrarily interferes with the exercise
C of the right guaranteed in
Part III of the Constitution.
Once it is established that the statut.e is prima .facie unconstitutional,
the state has·to establish that the restrictions imposed are reasonable and
the objective test which the court
to employ is whether the restriction
bears reasonable relation
to the authorized purpose or an arbitrary en-
D croachment under the garb
of any of the exceptions envisaged in
Part III.
E
F
G
H
The reasonableness is to the necessity to impose restriction; the means
adopted to secure that end
as well as the procedure to be adopted to that
end.
The court has
to maintain delicate balance between the public inter
est envisaged in the impugned provision and the individual's right; taking
into account, the nature
of his right said to be infringed; the underlying
purpose
of the impugned restriction; the extent and urgency of the evil
sought to
be remedied thereby; the disproportion of the restriction im
posed, the prevailing conditions at
the time, the surrounding circumstances;
th~ larger public interest which the law seeks to achieve and all other
relevant factors germane for the purpose.
All. these factors should enter
into the zone
of consideration to find the reasonableness of the impugned
restriction. The court weighs
in each case which of the two conflicting
public or private interest demands greater protection and
if it finds that
the restriction imposed is appropriate, fair and reasonable, it would uphold
the restriction. The court would not uphold a restriction which
is not
germane
to achieve the purpose of the statute or is arbitrary or out of its
limits.
This
Court in Joseph K1m1villu Vel/11k1mnel v. Reserve Hank o(India
& Ors.,[1962] Suppl. 3 SCR 632, held that the RBI is "a bankers' bank
and lender
of the last
resort." Its objective is to ensure monetary stability
in India and to operate and regulate the credit system of the country. It
-
'
'"'·
PEERLESS CO. v. R.B.I.[RAMASWAMY, J.] 455
has, therefore,
to perfonn a delicate balance between the need to preserve
and maintain the credit structure
of the country by strengthening the rule
as well as apparent credit worthiness
of the banks operating in the country
and the interest
of the depositors. Jn under developed country like ours,
where majority population are .illiterate and poor and are not conversant
with banking operations and in under-developed money and capital mar
ket with mixed economy,
!he constitution charges the state to prevent
exploitation and
so the RBI would play both promotional and regulatory
roles. Thus the R.B.I. occupies place
of
"pre-eminence" to ensure mon
etary discipline apd to regulate the economy or the credit system of the
country as an expert body.
It also advices the Government in public -{° finance and monetary regulations. The banks or non-banking institutions
shall have
to regulate their operations in accordance with, not only as per
the provisions
of the Act but also the rules and directions or instructions
issued by the RBI
in exercise of the power thereunder. Chapter 3B
expressly deals with regulations of deposit and finance received by the
R.N.B.Cs·. The directions, therefore, are statutory regulations.
In State of U.P. v. Babu Ram, [1961] 2 SCR 679, this Court held
that rules made under a statute must be treated, for all purposes
of con
struction or obligations, exactly as
if they were in that Act and are to the
.J.-same effect as if they contained in the Act and are to be judicially noticed
. for all purposes
of construction or obligations. The statutory rules cannot
be
destribed or equated with administrative directions. In D. V.K.Prasada
Rao v. Govt. of A.P .• AIR 1984 AP 75, the same view was laid. Therefore,
the directions are incorporated and become part
of the Act itself. They
must be governed by the same principles as the statute itself. The statu
tory presumption that the legislature inserted every part thereof for a
purpose and the legislative intention should
be given effect to, would be
~--
applicable to. the impugned directions. ·
The R.B.I. issued the direct.ions to regulate the operations of the
R.N.B.Cs., to safeguard the interest
of the depositors.
Payment of interest,
bonus, premium or other advantage,
in whatever name it may be called is
reward for waiting or parting with liquidity. It is paid
"'°cause of positive
time preference (one rupee today
is preferred to one rupee tomorrow) on
the part
of the depositor. Therefore, the directions avowed to preserve the
right
of the depositors to receive back the
lfmount depos.ited with the
contracted rate ·of interest; h aims to prevent depletion of the deposits
collected from the weaker segments
of the society and also tends to effect
free flow
of the business of the R.N.B.Cs. who would desire to operate in
their own way. The question, therefore, emerges whether the directions in
paras
5 and 12 violate Arts. 14 and l 9(l)(g) of the Constitution.
A
B
c
D
E
F
G
H
A
B
c
D
E
F
G
456 SUPREME COURT REPORTS [1992] 1 S.C.R.
The solidarity of political freedom hinges upon socio-economic de
mocracy. The right
to development is one of the most important facets of
basic human rights. The right to self interest is inherent in right to life.
Mahatma Gandhiji, the Father of the Nation, said that
"Every human
being has a right to live and therefore
to find the wherewithal to feed
himself, and where necessary, to clothe and
house himself'. Article 25
of the Universal Declaration of Human Rights provides that "everyone has
a right to a standard
of living adequate for the health and well being of
himself and of his family, including food, clothing, housing and medical care." Right to life includes the right to live with basic human dignity
with _necessities
of life such as nutrition, clothing, food, shelter over the
head, facilities for cultural and socio-economic well being
of every indi
vidual.
Art. 21 protects right to life. It guarantees and derives therefrom
the minimum
of the needs of existence including better tomorrow.
Poverty is not always an economic problem alone. Very often it is a
social as well as human problem.
An agricultllfist, an industrial worker.
the daily wage earner, rickshaw puller and small self-employed teacher,
artisan, etc. 1nay have an earning but 1nay be proi1e to spend his/her entire
earnings, apart from on daily necessities of life, on socio-rel.igious occa
sions, fairs. festivals etc. The urge for better tomorrow and prosperous
future; the clamour
for freedom from want of any kind and social security,
make the vulnerable segments
of the society to sacrifice today's comforts
to save for better tomorrow. The habit
of saving has an educative value
for thrift.
It endeavors to bring an attitudinal change in life. It enables
individuals to assess future specific needs and to build
up a financial
provision for the purpose. The habit
of saving becomes a way of life and
harnesses the meagre resources
to build up better future. During the days
of rising prices, small savings serve as instrument to mop up the extra
purchasing power.
In additio1 to wage a war against. poverty, waste,
unwise spending, hoarding and other activities, habit of saving also ena
bles family budgeting and postponing expenditure which can be deferred ~
in· favour of better utilisation in future. To strengthen the urge for thrift
and streamline the social security, the disadvantaged need fre~dom from
exploitation and Art.46
of the constitution enjoins the
State to protect the
poor from all forms
of exploitation and social injustice.
Investment agencies on commercial banks are intermediaries be
tween savers and investors. They embark upon deposit mobilisation cam
paign
to mop up the limited resources.
Commercial banks or financial
investment agencies,
be it public sector or private sector, are vying with
H one another to scale new heights in deposit growth each year, devising
,J,..C-
PEERLESS CO. 1•. R.B.1.[RAMASWAMY, J.] 457
different deposit schemes to suit the individual needs of the depositors or
savers.
Mushroom growth of non-banking agencies put afloat diverse
schemes
with alluring offers of staggering high rate of interest and other
catchy advantages
which would generate suspicion of the bona fides of
the offer. But
gullible depositors are lured to make deposits. It is not
unconunon that after collecting fabulous deposits, some unscrupulous people
surreptiously close the company and decamp with the collections keeping
the depositors
at bay. Therefore, the need to regulate the deposits/sub
scriptions,
.in particular, in private sector became imperative to prevent
exploitation or mismanagement
as social justice stratagem.
The directions are, therefore, a social control measure over the
R.N.B.Cs.,
in matters connected with the operation of the schemes or
incidental thereto.
The direction to investment in the channelised schemes
at the given percentage in clauses (a) and (bl of proviso to para 6( I) was
intended to deposit or keep deposited the collections in fixed deposit in
the public sector banks or invest or keep invested in unencumbered
approved securities
so as to ensure safety. steady
growth and due payment
to the subscribers at maturity of the principal amount and the interest,
bonus. premium or other advantage accrued thereon. The amounts depos
ited shall not be less than the total aggregate amounts of liabilities to the
subscribers . The deposits or securities shall not be withdrawn or other
wise be dealt with except for a repay1'ient to the subscribers. It should
always
be shown to be a liability
rm date of the repayment.
This court
in
/Ja1isi11Rh MfR. Co. Ltd. & Anr. v. l!nio11 o/ India &
Ors .. [ 1960) 3 SCR 528, held that freedom to carry on trade or business
is not an absolute one. In the interest of the general public. the law may
impose restrictions on the freedom of the citizen to start. or carry on his
business, whether an irnpugned provision i1nposing a fetter on the exercise
of the fundamental right guaranteed by Art. 19( I )(g) amounts to a reason
able restriction
imposed in the interest of
general public, must be ad
judged not in the background of any theoretical standard or pre-detenni
nate patterns, but in the light of the uature and the incidence of the right,
the interest of the general public sought to be secured by imposing restric
tions
and the reasonableness of the quality and the extent of the fetters
imposed
by the directions. The credit worthiness of R.N.B.Cs. undoubt
edly would be sensitive.
It thrives upon the confidence of the public, on
the honesty of its management and its reputation of solvency. The direc
tions intended
to promote
"freedom" and "facility" which are required to
be regulated in the interest of all concerned. The directions as a part of
the scl1eme of the Act would be protected from the attack. Yide Latq/at
Ali Khan & Ors. v. Stale of'U.!' .. (1971] Supp. SCR 719.
A
B
c
D
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F
G
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A
458 ' SUPREME COURT REPORTS (1992] I S.C.R.
The R.N.B.C. is required to conducf its business activities in the
interest
of the depositors or
'sub~cribers who are unorganised, ignorant,
gullible and ignorant
of the banking operations. If, however, the acts of R.N.B.C. is detrimental to the interest of the depositors, etc. the R.B.I. has
power in Chapter 3B to issue directions and the R.N.B.C. is bound to
comply with the directions and ·non-compliance thereof visits with penal
B action.
c
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F
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H
Admittedly except
Peerless General Insurance, the other companies
do not have either paid-up capital or reserve fund worth the name. Peer
less was established in the year 1932 and over the years it built up reserve
fund. R.N.B.Cs. are carrying their business by crediting the entire first
year's collections as a capital receipt under actuarial accounting method.
In the affidavit
of
Sri S.S. K;trmic, the Chief Officer of the RBI filed on
August
13, 1991, it was stated that prior to the directions, 747
R.N.B.Cs.
were doing the business. As on that date only 392 R.N.B.Cs. were noti
fied to
be existing.
Out of them 178 are in West Bengal, 15 in Assam, 26
in Orissa, 6 in Manipur and Meghalaya, 26 in Punjab, 64 in U.P., 22 in
Delhi, etc.
As on March 31,
1990 out of 185, 35 R.N.B.Cs. alone submit
ted annual returns, and out
of them only
30 have filed the balance
sheets. 28 R.N.B.Cs. in the northern region filed their annual returns and
23 filed their balance-sheets with incomplete date. 35 of them have
negative net-worth (loss for exceeding their share capital and reserve).
Apart from Peerless, the aggregate capital investment of 15 companies
accounted to Rs.158 lacs. The negative net-worth
of the 35 companies
referred to above would aggregate
to Rs.3.6 crores. They raised, apart
from Peerless, deposits to the tune of Rs.86 crores. Many of them have
not even designated their banks as required under para 6
of the direction.
The amount invested in bank deposits and approved securities fell much
short
of their deposit liabilities. Verona
Commercial Credit and Invest
ment Company, .one of the respondent3, have accumulated losses to the
tune
of Rs.3. 8 crores. As per balance-sheet their assets are inadequate to
meet the liability. Favourite
Small Scale Investment, one of the respond
ents as on December 12, 1989, even their provisional balance-sheet shows
that total lial>ility towards depositors is Rs.44.62 crores while its invest
ment in banks and Government security
is only Rs.13 crores. The cash on
hand was Rs.1.74 crores. Rs.8 crores were shown to be loans and ad
vances. The accumulated losses are Rs.22.19 crores
as against total share
capital and reserve ofRs.20.73 lacs.
It is, thus, clear on its face that while
total liabilities are Rs.49.09 crores, the assets including doubtful loans and
advances aggregate to Rs.26 crores.
An inspection into the affairs of the
said company conducted in February,
1990 disclosed that upto the end of
1989 the deposit liabilities including ·interest would be in the region of
,_
PEERLESS CO. v. R.B.l.[RAMASW AMY, J.) 459
over
Rs. 132 crores. The difference between the. inspection and the bal-
A
ance-sheet would be due to actuarial principle. It had committed default
to pay to its depositors to the tune
of Rs.5.4 crores,.which is a gross
under-estimate.
Sri Somnath Chatterjee, the learned Senior Counsel for the Peerless
and adopted by other counsel, contended that paragraphs 6 and 12 are B
totally unworkable. Its compliance would jeopardise not only the existing
companies but also the very interest
of the depositors and large workmen.
No new company would be set up. The direction given in the first
Peer-
less case was to keep in view the interest of the workmen as well; in effect
_it was given a go-bye. At least 25% of collections would be left over as
working capital
of the company, io carry on its business in a manner
C
indicated by the impugned judgment, so that no depositor would lose his
money and no workman would lose his livelihood and it will
be in
conso
nance with public interest. Shri G. L. Sanghi, the learned Senior Counsel
for Timex, contended that 50% of collection would be necessary to com-
ply with the impuged directions and another company pleaded for 40% .
Further contention
of
Shri Chatterji was that the actuarial accounting nei- D
ther violates any law, nor objected to by the Income-tax Department.
Crediting the first year's subscription
in the accounts as capital receipt
would generate company's working capital for its successful business by
meeting the expenditure towards establishment,
the commission and a part
of profits. Forfeiture clause was already deleted before the directions
were issued. Interest at
10% with annual compounding would be reason-E
able return to
the subscribers which is being ensured to the depositors.
The directions issued
by the High
Court~ subject to the above modifica
tions, would subse1"Ve the above purpose. Paras 6 and 12, otherwise, are
arbitrary and prohibitive violating their fundamental right to do business
assured by Arts. 19(l)(g)
and 14.
Sri Harish Salve resisted the conten-
tions with ability. F
Para
12 is myocardium and para 6' is the heart of the directions
without which the directions
would·be purified corpse. On the respond··
ents own showing, for the first two years, by actuarial accounting; the
liabilities,
as against
depo1its, are inadequate. The regulation intends to
preserve the corpus
of the deposits and the interest payable thereon as on G
date to be a tangible and unencwnbered asset at all times, though not
repayable. Indisputably ihe depositors/subscribers stand
as unsecured credi-
tors. Undoubtedly every measure cannot.be viewed or interpreted
in the
event
of'catastrophe overtaking the company. The catchy afid alluring but
beguiled le1'111S of offer atiract the vulnerable segments of the society to
subscribe a1i'd keep subscribing the small savings for better tomorrow. ,H
A
B
c
D
E
F
G
H
460 SUPREME COi JRT REPORTS [I 992] I S.C.R.
But many a time, by the date of maturity, their hopes are belied and
aspirations are frustrated or dashed to ground. They remain to be helpless
spectators
with all disabilities to recover the amounts. Pathetic financial
position of
some of the companies enunierated herein before would amply
demonstrate
the
agony 'to which the poor subscribers would be subjected
to. The fixed deposits and unencumbered securities as per Clauses (a) and
(b) of the proviso to paragraph 6( I) would be 80% of the collections of
the year of subscription and Shri Chatterji contends to reduce it to 75%
and to allow free play to use the residue in their own way. The difference
is only 5% and others at vagary. The objects of the direction are to
preserve the ability of the R.N.B.C. to pay back to the subscribers/deposi
to"rs at any given time; safety of the subscribers' money and his right to
~nencu1nbered repayn1ent are thus of paratnount public interest and the
directions aimed to protect them. The directions cannot and would not be
adjudged to be 11/rru 1•ires or arbitrary by reason of successful financial
1nanage1n·ent of an individual co1npany. An over all view of the working
syste1n of the schen1e is relevant and gennane.
The oblightion in paragraph 12 of periodical disclosure in the ac
counts of a company of the deposits together with the interest accrued
thereon. whether
or not payable but admittedly due as a liability. is to
monitor the discipline of the operation of the schemes and any infraction,
would be dealt with as per law. The certificate by a qualified
Chartered
Accountant is to vouchsafe the correctness and authenticity of accounts
and would and should adhere to the statutory compliance.
The settled accounting practice is that a loan or deposit received
from a creditor has to be shown as a liability together with accrued inter
est whether due or deferred. The actuarial accounting applies to revenues
and costs to which the concept of the "going concern" can be adopted.
Therefore,
in providing the costs of the company it can set apart its costs
on the basis that liability is created for interest, bonus etc. payable in
foreseeable future. Undoubtedly the actuarial principle applied by the L.l.C. or the gratuity schemes are linked with life of the assured or the
premature death before retirement of an employee, but R.N.B.C. in its
contract does not undertake any such risk. The deposit or loan is a capital
receipt
but not a revenue receipt and its full value shall be shown in the
account
books or balance-sheet as liability of the company.
It cannot be
credited to the profit and loss account. Para II of Schedule VI of the
Companies Act, 1956 requires that the amount shown in the profit and
loss account should be confined to the income and expenditure of the
company. Para 12 of the directions is, thus." in consonance with the
Companies Act. Moreover, in its advertisement and the application fonns,
,
PEERLESS CO. 1-. R.B.l.[RAMASWAMY, J.) 461
the R.N.B.C. expressly hold out to the public that their monies are safe A
with the bank and in the Government securities. Paragraph 6(1) of the
directions only mandates compliance of
the promise held out by an
R.N.B.C.
for repayment at maturity. Sub-para (3) of para 6 keeps the deposits
unencumbered and
to be utilised by the company only for repayment. In
other words, paragraph 6 only elongates the contract in the public interest
to safeguard the interest of the vulnerable sections of the depositors. The B
R.B.I. cannot be expected to constantly monitor the working of the
R.N.B.C.
in its day-io-day function. The actuarial basis cannot be adopted by the
R.N.B.Cs and the liability must always be reflected in its balance-sheet at
its
full value.
Compliance ofthe direction in para 12, dehors any method
of accountancy adopted by a company, intended to discipline its opera-
tiou. C
No-one can have funda1nental right to do any i..1nregulated business
with the subscribers/depositors' money. Even the banks or the financial
companies are regulated
by ceiling on public deposits fixing nexus be-
tween deposits and net-worth of the company at the ratio of 3:
I, i.e. 25%
of the capital net-worth. No one would legitimately be expected to get D
immediate profits or dividend without capital invesnnent. The concept of
profit or interest pre-supposes capital investment. The effect of the clause
(a) and
(b) of the proviso to paragraph
6(1) of the .direction, no doubt,
freezes the right to profit for a short ti1ne, an~ fa.Stens an incidental and
consequential obligation to mop up paid up capital or investment towards
establishment and commission charges
to tide over teething trouble. But E
that
is no ground to say that it is impossible fo compliance, nor could it be
said that the directions are palpably arbitrary or unreasonable. Anyone
may venture to do business without any stake of his own but is subject to
the regulations. A new company without any paid up capital, no doubt,
cannot
be expected to come into existence nor would operate its business
at initial existence with profits. Clause (cl of the proviso to paragraph F
6( I) of the directions gives freedom. on leeway to invest or rotate, not
n1ore thail. 20 per cent of collections etc. in any profitable inanner at its
choice as a pn1dent businessn1an to generate its resources to tide over the
teething troubles till it is put on rails to receive succour to its existence,
without inhibiting the co1npany's capacity to 1nop up sn~all savings, and
the directions do not control its operation. The only rider is the approval G
of the Board of Directors which is inherent. Absence of imposition of any
limit
on quantum of deposits with reference to paid up capital or reserve
fund like non-banking financ.ial
co111panies .. et.c. is a pointer in this regard.
Thus there· is a reasonable nexus between the regulation and the public
purpose. namely, security
to the depositors' money and the right to repay-
ment without
any impediment, which undoubtedly is in the public interest. H
462 SUPREME COURT REPORTS [ 1992] I S.C.R.
A Looking from operational pragmatism, the restrictions though appar-
ently appears to be harsh in form,
in its systematic working, it
would·
inculcate discipline in the business management, silbserve public confi
dence
in the ability of the company to honour the contractual liability and
assure due repayment at maturity
of the amount deposited together with
interest, etc. without any impediment.
In other words, the restrictions in
B paragraph 6 of the directions intended to alongate the twin purposes, viz.
habit
of thrift among the needy without unduly jeopardising the interest of
the employees of the companies and the
R.N.B.Cs. working system itself
in addition to safety and due payment of depositors' money. True, as
contended by Shri Chatterji that there arises corresponding obligation to
pay higher amount
of commission to its agents and the commitment should
C be kept perfonned and the confidence enthused in the agents. But it is the
look out
of the businessman.
The· absence of ceiling on the rate of
commission would give choice between the company and its agents to a
contract
in this regard and has freedom to manage its business. The R.N.B.Cs. are free to incur such expenses and organize their business as
they desire including payment
of commission as they think expedient.
D But the subscribers/depositors' liability, under
no circumstances, would be
in jeopardy and the directions were designed to en.sure that the interest of
the subscribers/depositors is secured at all times, prescribing investment
of an equal sum to the total liability to the subscribers/depositors.
Paragraph
12 is only a bridge between the depositors and the promise held
out and the contract executed
in furtherance thereof as a monitoring
E myocardium to keep the heart
in paragraph 6 functioning without any
hiatus.
It is settled law that regulation includes total prohibition in a
given case where the mischief to be remedied warrants total prohibition.
Vide
Narendra Kumar v. Union
'!f India, [1960] 2 SCR 375. But the
directions
do not do that but act as a siphon between the subscriber/ · depositor and the business itself. Therefore, they are neither palpably
F arbitrary nor unjust nor unfair. The mechanism evolved
in the directions
is fool-proof, as directed by this court in first Peerless case, to secure the
interest
of the depositors, as well is capable to monitor the business man
agement
of every
R.N.B.C. It also, thereby, protects interest of the em
ployees/field staff/commission agent etc. as
on pennanent basis overcom
ing initial convulsions.
It was intended, in the best possible manner, to
G subserve the interest of all without putting any prohibition in the ability of
a company to raise the deposit, even in
the absence of any adequate paid
up capital or reserve fund or such pre'commitment
of the owner, to secure
such deposits.
H
Thus the directions impose only partial control in the public interest
of the depositors. The deposits invested or keep invested qua the com-
PEERLESS CO. v: R.B.l.[RAMASWAMY, J.J 463
pany always remained its fund till date of payment at maturity or prema-A
ture withdrawal in terms of the contract. The effect of the impugned
judgment
of the Calcutta High Court namely redefinition of the aggregate
liabilities as contractual liabilities due and payable would have the effect
of requiring the R.N.B.Cs. to deposit an amount equal to the sum payable
only in the year
of maturity allowing free play
to the R.N.B.Cs. to use the
subscriptions/deposits in its own manner during the entire earlier period,
B
jeopardise the security of the subscribers/depositors and are self-defeating.
The
Sagging mismanagement prefaced hereinabove would be perpetrated
and the depositor is always at the mercy
of the company with all disabili-
ties, killing the very goose namely the thrust
to save for prosperous future
or to tide over future needs.
It is well settled that the court is not a Tribunal from the crudities
and inequities
of
complil:ated experimental economic legislation. The
discretion in evolving an economic measures, rests with the policy makers
and not with the judiciary. Indian social order
is beset with social and
economic inequalities and
of status, and in our socialist secular demo
cratic Republic, inequality is an anethema
to social and economic justice.
The constitution
of India charges the state to reduce inequalities and
ensure decent standard
of life and economic equality. The Act assigns the
power to the
RBI to regulate monitory system and the experimentation of
the economic legislation, can best be left to the executive unless it is
found to
be umealistic or manifestly arbitrary. Even if a law is found
wanting on trial,
it is better that its defects should be demonstrated and
removed than that the law should be aborted
by judicial fiat.
Such an
assertion
of judicial power deflects responsibilities from those on whom a
democratic society ultimately rests. The court has
to see whether the
scheme, 111easure or regulation adopted is relevant or appropriate to the
power exercised by the authority. Prejudice to the interest of depositors is
a relevant factor. Mismanagement or inability to pay the accrued lia.bili
ties are evils sought to be rernedied. The directions designed to preserve
the right of the depositors and the ability of R.N.B.C. to pay. back the
contracted liability.
It also intended to prevent mismanagement of the
deposits collected from vulnerable social segments who have
no knowl
edge
of banking operations or credit system and repose unfounded blind
faith on the company with fond hope of its ability to pay back the con
tracted a1nount. Thus the directions Jnaintain the thrift for saving and
stream!ine and strengthen the monetary.operations ofR.N.B.Cs.
c
D
E
F
G
The problems of Government are practical and do require rough
acconunodation. Illogical it 1nay be and unscientific it n1ay seen1 to be, H
left to its working and if need be. can be remedied by the
R.B.I. by
A
B
c
D
E
F
G
H
464
SUPREME COURT REPORTS [1992] I S.C.R.
pragmatic adjustment that may be called for by particular circumstances.
The impugned directions may at first blush seem unjust
or arbitrary but
when broached
in pragmatic perspective the mist is cleared and that the
experimental economic measure
is manifested to be free from the taints of
unconstitutionality.
Para
19 of the directions empowers the RBI to extend time for
compliance or to exempt a particular company
or a class thereof from all
or any of the provisions, either generally or for a specified period subject
to such conditions as may be imposed. Power to exempt would include
the power to be exercised from time to time as exigencies warrant.
An
individual company or the class thereof has to place necessary and rel
evant material facts before the R.B.I.
of the hardship and
the· need for
relief A criticis1n of arbitrariness of unreasonableness n1ay not be ground
to undo what was conceived best in the public interest. What is best is not
always discernable. The wisdom
of any choice may be disputed or con
demned. Mere errors
of Government are not subject to judicial review.
The legislative remedy may
be ineffective to' mitigate the evil or fail to
achieve its purpose. but it is the price to be paid for the trial and error
inherent
in the economic legislative efforts to grapple with obstinate so
cial issues.
It is proper for interference in judicial review, only. when the
directions, regulations or restrictions are palpably arbitrary, demonstrably
irrelevant or discriminatory. Exercise
of power then can be declared to be
void under Art.
13 of the Constitution. So long as the exercise of power is
broadly within the zone
of reasonableness. the court would not substitute
its judgment for that
of legislature or its agent as to matters within their
prudence and power. The court does not supplement the feel
of the
experts
by its own values.
It is settled law that so long as the power is traceable to the statute.
rn·ere 01nission to recite the provision does not denude the power of the
legislature or rule 1naking authority to 1nake the regulations. nor consid
ered without authority of law. Section 114 (h) of the Evidence Act draws
a statutory presumption that official acts are regularly perfom1ed and
reached satisfactorily on consideration of
~elevant facts. The absence of
reiteration of objective satisfriction in the prea1nble as of one under s.45L
does not denude the powers. the R.B.I. admittedly has under s.45L to
justify the actions. Though s.45L was neither expressly stated nor men
tioned
in the Preamble of the directions of the required recitation of
satisfaction of objective facts to issue the directions from the
facts and
circun1stances it is de1nonstrated that the R_R_I. hnd such satisfaction 111 its
consideration of its po\ver undt•r ~-451.. \~hL'll the directions v.:ere issued
Even otherv.:i~e s.-l5 K ()) it:--L·lfh sufliL-lt'nl 1t1 uplll)ld the dirt'L'l11-rh
..A--
•
PEERLESS CO. v. R.B.1.[RAMASWAMY, J.[ 465
The impugned directions are thus within the power Of the R.B.I. to A
provide tardy, stable, identifiable and monitorable method of operations
by each R.N.B.C. and its compliance of the directions. This will ensure
security
to
tl1e depositors at all times and also make the accounts of the
con1pany accurate. accountable and easy to 1nonitor the woiking syste1n of
the company itself and continuance of its workmen. The directions in
paragraphs 6 and 12 are just, fair and reasonable not only to the deposi-B
tors, but in the long run to the very existence of the company and its
continued business itself. Therefore,
they are legal, valid and constitu-
tionally pennissible.
•
The Writ Petition is dismissed and the appeals are allowed. The
Writ Petitions tiled
in the
High Court stand dismissed. No costs in this C
Court.
G.N. Petition dismissed
Appeals allowed .
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