A

B

c

D

RESERVE BANK OF INDIA AND ORS.

v.

PEERLESS GENERAL FINANCE AND INVESTMENT

COMPANY LTD. AND ANR.

JANUARY 19, 1996

[S.C. AGRAWAL AND G.B. PATTANAJK,, JJ.]

Reserve Bank of India Act, 1934-Sectwn 45;K (3)-Pnwer of Reserve

Bank to issue

directions-Scope of-The Section confers a wide power

011 the

Bank to issue directions and the said power is not restricted to or limited to the

receipt of deposits only-The Section is an ·eiiabling Provision-Held, ena­

bling provision n1ust be so construed as to subserve the purpose for which it

has been enacted.

Residuary Non-Banking Companies (Reserve Bank) Directions

I987-Para 4A (as inserted by Notification dated I9.4.I993)-Enacted to

prevent evasion of directions contained in Paras 6 & 12 o_f 1987 DireLtions­

Held, Directions fall within the power conferred on the Bank to issue

directions--R.esiduary Non-Banking Companies (Res,erve Bank) Directions

I987-Paras 6 to I2.

E Suggestio'tzs to U. 0.1 . ..:.._To create separate instrumentality to supervise

and enforce the provisions regulating the' fUnctioning

1

of the

companies._,__iVhether ex.iSting p'rovisions needed further 'strengthening so as

to give greater protection IQ depositors-Whether the prov~sions, similar to

the provisions for Deposi(Protecrion Scheme in the Banking Act, 1987 of

,.

England can be introduced in India-l?.equirement for introduction in India. ;.....

F

G

Constitution of India, I950 Art. 14-Non-Banking Companies (Reserve

Bank) Directions,

I987-Para 4A (as inserted by Notification dated

I9.4.I993-Fixing of Rs.

10 as uniform amount by Bank for expenses .for

brochure/ Application forms

& servicing deposit or account-Held, not violative n,f Article 14-Equal treatment ofIAnequal objects, transaction or persons, not

liable to be._ struck down as discri1ninatory unless there is simultaneously

absence of a rationattelation lo the object intended to be achieved by the law.

The 1987 Direction~~applicable to non·banking cornpanies and not to

co1nmercial banks-Held siinilarity not proved-Hence not discriminatory.

H Art. I9( I)( g)-Non-banking Companies prohibited from recovering any

58

),.

RBI v. PEERLESS GENL. FINANCE 59

an1oullf us processing/nulintenance Gharge-Para 4A-Whether violative of A

Article 19( I )(g)-Held, not violative-SEBI (Mutual Funds) Re11ulation, 1993.

!11terpretation of Stalutes--Construction of enablillf? provisio11-To be

construed as to subserve the pu17HJse o.f lVhich it ivas enacted.

Words & Phrases :-"lncluding"--Meaning of

In order to regularise the non-hanking financial· companies, the

Reserve Bank of India Act, 1934 was amended by Act

No. 55 of 1963 and

Chapter III-B

(Section 45(H) to 45 (Q) was inserted. Section 45-K enables

the Reserve Bank of India, to collect information from non-banking

institutions as

to deposits and to give directions to such institutions.

B

c

After insertion of Chapter -

10-B the Reserve Bank issued Misc. Non­

Banking Companies (Reserve Bank) Directions, 1973 to regulate accept­

ance of deposits by non-banking companies. Respondent Company, a non­

banking financial company, sought exemption from complying with the D

above directions.· Exemption was granted only from para 4 of the Direc­

tions.

In 1977, Non-Banking Financial Companies (Reserve Bank) Direc­

tions, 1977 were issued wherein a ceiling was fixed in respect of the period

for which deposits could be accepted.

E

The Respondent Company applied for the exemption from the said

provision of the 1977 Directions. During the pendency of the exemption "" application, Prize Chits and Money Circulation Schemes (Banking) Act

1978 was enacted by Parliament. The Reserve hank took the

view that the

schemes of the Respondent Bank were covered by the Act. 1978,

and

directed the Respondent Company to wind up its business and cancelled the

exemption which was granted already.

F

The Respondent Company filed Writ Petition in the Calcutta High

Court with the plea that the 1978 Act did not apply to them. The writ G

Petition was allowed and the Reserve Bank filed appeal to the

Supreme

Court. Supreme Court dismissed the appeal of the Reserve Bank with the

observation that the Bank should regulate such schemes to prevent exploi­

tation of ignorant subscribers. (Peerless· I*)

In

view of the observation made by the

Supreme Court in (Peerless-H

60 SUPREME COURT REPORTS [1996] 1 S.C.R.

A 1), the Reserve Bank issued Residuary Non-Banking Companies (Reserve

Bank) Directions, 1987.

After issuance of the

1987 Directions, Timex General Finance and

Investment Ltd. filed writ petition in High

Court challenging the validity

of the said Directions. The High Court directed the Reserve Bank to

B modify the 1987 Directions. After the decision, the Respondent Company

got itself implcaded as respondent and obtained further directions from the

Court.

c

The Reserve Bank filed an appeal to the supreme Court & the

Respondent Company filed Writ Petition under Article 32, challenging the

validity of the

1987 Directions. It

was urged that the 1987 directions were

ultra vires the powers conferred on the bank and that Paragraphs 6 to 12

of the 1987 Directions were violative of the Rights guaranteed under

Article 19(1)(g).

It was further contended that if Paragraphs 6 & 12 were

not struck down, the company would face closure and the

14 lakhs field

D officers would lose employment. The court upheld the validity of

Para­

graphs 6 & 12 and held that the Reserve Bank had power to issue

directions nnder Section 45-K

(3) and further observed that working

capital

is not needed every

year,. it could not be mopped up out of

depositor's money and the company should make arrangement from its

E

F

own resources. (Peerless-II)*

The Respondent Company, in order to avoitl compliance with the

requirements of Paragraph 6 & 12 of the 1987 Directions, resorted to the

conrse of splitting up the amounts received in respect of the first two

instalments :

i.e. in yearly instalments of Rs.

100 for 10 years for

endowment sum of

Rs.

1400 Rs. 30 of the first instalment and Rs. 30 of the

Second instalment

was credited as processing charges and maintenance

charges respectively.

The Reserve Bank vide Notification dated April 19, 1993, amended

the 1987 Directions and inserted Paragraph

4A prohibiting the residuary

G non-banking companies from obtaining processing or maintenance charges

from the depositors/subscribers and further permitting to charge one time

initial sum, not exceeding

Rs.

10 towards cost or expenses for issuing

brochnre/application forms, servicing of depositor's account etc.

Paragraph 4

was also

amend<:d by Notification dated April 10, 1993

H reducing the maximum period for deposits from 120 months to 84 months.

•

'

'

•

•

RBI v. PEERLESS GENL. FINANCE 61

Aggrieved by the 1993 amendments the Respondent Company filed A

Writ Petition before the High Court challenging the validity of the

amendment. The High Court held that the Notification dated April

19,

1993, was ultra vires the power conferred on the Bank and the bank was

not competent to

isrne the notification under Sections 45-J, 45-K or 45-L

of the Act.

B

In appeal to the Supreme Court. by the Reserve Bank it was con­

tended

by the Respondent Company that the processing/maintenance

charges, being non-refundable in nature are not deposits, thus

Paras 6 &

12of1987 would not apply on them; that Paragraph 4A is violative of the

right to equality guaranteed under Article

14, treating the unequals as

C

equals by fixing uniform maximum ceiling of Rs. JO towards costs &

expenses; and treating the equals unequally by not exercising the control

on the similarly situated commercial banks : that the directions in para

4A are also violative of the rights guaranteed under Article 19(l)(g); that

the powers conferred on the bank under Section 45-K

(3) is limited, as the D

words

"relating to or connected with the receipt of deposits" in section 45-

K (3) are to be used in the restricted sense, in view of the words following

it. Further it was contended that in the scheme started by the Respondent

Company after

Peerless fl, processing/maintenance charges was slightly

more than 4 % of the whole amount and in the new scheme the same is less

than 3% of the endowment snm; setting apart of the amount towards

processing and maintenance charges did not prejudicially affect the

de­

positor because on maturity he was being paid the total amount paid by

him including the processing and maintenance charges, without causing

any loss to the depositor : and that the processing/maintenance charges,

E

are less than 6% of the endowment sum payable on maturity as per F

Regulation

SO of SEBI (Mutual Funds) Regulations 1993.

The Reserve Bank, on the other hand contended that the Bank was

competent lo issue directions contained in Para 4A; that the directions

contained in Para 4A were designed to prevent the evasion of the direc­

tions contained in Paras 6 & 12 of 1987 Directions, which were upheld

in Peerless-II*

and the power to issue directions contained in paras 6 &

12 would necessarily encompass the power to issue directions to ensure

G

that they are not avoided by contrivances or devices; and that powers

under section 45-K

(3) are of very vide amplitude and the words

"in

respect of any matter or connected with the receipt of deposits" occurring H

62 SUPREME COURT REPORTS [1996] 1 S.C.R.

A in the section arc not restricted by the words which follow these words.

Allowing the appeal, this court

HELD : 1.1.

It is within the competence of the Bank to issue directions

in the n.ature contained

in

Paragraph 4A of the Residuary Non-Banking

B Companies (Reserve Bank) Directions 1987. The Bank has been given power

. to issue directions in respect of any matter relating to

or connected with the

c

· receipt of deposits. The words " in respect of any matters relating to or

connected with the receipt of deposits" in section 45K(3), confer a wide power

on the Bank to issue directions and the said power

is not restricted to or

limited to the receipt of deposits only. The amplitude of this power cannot

be curtailed

by the words

"including the rates of interest payable on such

deposits and the periods for which the deposits may

be

received" in section

45-K(3). Though the word "including" is generally used in extensive sense

to bring within the ambit of the provision, matters referred to in the inclusive

clause which normally would have been covered by the provisions, but that

D

is not always so. Many times the legislature uses an inclusive phrase to

specifically include a matter

by way of abundant caution. Having regard to

the object and purpose underlying the enactment of section 45K, the words

"including the rate of interest payable on such deposits and the period for

which the deposits may

be

received" do not seem to be restricting the ambit

E

F

G

H

of the words

"in respect of any matters relating to or connected with the

receipt of deposits". Which must, therefore be given their natural

meaning. [81-B-D)

*Peerless General Finance & Investment Company Ltd. v. Reservee

Bank qf India, [1992) 2 SCC 343, relied on.

Madhav Rao Jivaji Scindia v. VO!, [1971] 1 SCC, 85, distinguished.

1.2. Section 45 K (3) of the Reserve Bank of India Act is an enabling

provision enacted to empower the Bank to regulate the conditions on

which the deposits may

be accepted by non-banking companies or

institu­

tions and to prevent malpractices in the matter of acceptance of such

deposits. Such an enabling provision must be so construed as to subserve

the purpose for which it has been enacted.

In the matter of construction of

enabling statutes, the principle applicable

is that if the legislature enables

something to be done, it gives power

at the same time, by necessary

implication, to

do everything which is indispensable for the purpose of

carrying out the purpose in

view. The power to make a law with respect

•

RBI v. PEERLESS GENL. FINANCE 63

to any subject, carries with it all the ancillary and incidental powers to A

' prevent evasion. [79-C, 82-C]

*Sodhi Transport Company v. State of U.P., [1986] 1 SCR, 939,

referred

to.

Francis Bennion, on statutory Interpretation-2nd Edition, Crais on B

Statutes, 7th Edition, referred to.

1.3. Paragraph

4A which has been inserted by notification dated

April 19, 1993, in the 1987 Directions, falls within the power conferred

on the bank to issue directions under Section 45 K(3) of Reserve Bank of

India Act, 1934. The processing/maintenance charges

or other similar

charges received by a non-banking company from the subscriber to the

schemes are received with the avowed purpose of processing the

mainte­

nance of the deposits by the subscriber under the scheme. These amounts

are received as

part of the instalments paid by the subscriber. They are

undoubtedly related to

or connected with the receipt of deposits and it is

not possible to say that the said charges are not matters related to or

connected with the receipt of deposits. The directions contained in para­

graph 4A, seeks to prevent evasion of the directions contained in

Para­

graphs 6 & 12 of 1987 Directions. If the bank is competent to give the

directions contained in Paragraphs 6

& 12 of the 1987 Directions, it stands

to reason that the bank should be competent to give directions which could

prevent evasion of those directions and secure their effective

implementa­

tion. [82-A, B, DI

* Peerless General Finance & Investment Company Ltd. v. Reserve

Bank

of India, [1992] SCC 343, referred to.

c

D

E

F

G

2.1. The fixation of uniform amount of Rs.

10 as per Paragraph 4A

inserted in the 1987 Directions, does not mean that Paragraph 4A, suffers

from the vice of discrimination on the ground that unequals

are being

treated equally. The equal treatment of unequal objects, transaction

or

persons, is not liable to be struck down as discriminatory unless there is

simultaneously absence of a rational relation to the object intended to be

achieved

by the law. The uniform amount of Rs.

10, prescribed in Para­

graph 4A, is for the expenses for brochure/application form and for

servicing the depositors account, which would be incurred by the residuary

non-banking companies, in respect of their schemes. The said charges H

64 SUPREME COURT REPORTS [ 1996] 1 S.C.R.

A would not vary from person to person and would normally be the same

B

c

in all the cases. [83-C, DJ ·'

Jalan Trading Co. (Pvt.) Ltd. v. Mill Mazdoor Union, [1967] 1SCR15,

referred to.

2.2. Paragraph 4A cannot be held to be violative of Article 14 of the

Constitution on the ground of discrimination based on the non-banking

companies being treated differently from commercial banks in the matter

of service charges, in

view of the fact that levying of servke charges in

respect of recurring deposit scheme similar

to that operated by the

respondent,

is not proved in respect of Commercial Banks.

[l!3-F]

3.1. Paragraph 4A, introduced in the 1987 Directions by way of

notification dated April 19, 1993,

is not violative of the rights guaranteed

nuder Article 19(1)(g) of the constitution. The fact that processing charges

and maintenance charges raised

by

Peerless are less than 6% of the

D endowment snm payable

on maturity, cannot be the basis for holding that

Paragraph 4A, imposes unreasonable restrictions on the right guaranteed

under Article 19(1)(g) of the Constitution. The Working of

Peerless and

residuary non-banking companies, cannot be equated with that of mutual

funds governed

by

SEBI (Mutual Funds) Regulation, 1993. The Schemes

E

operated by Peerless are also not comparable with those of Mutual Funds.

Though under the previous scheme, Peerless was receiving

by way of

processing/maintenance charges

30% of the first two instalments and in

the latter scheme 18% of the first instalment, bnt it is not disputed that a

number of schemes are discontinued after the payment of one

or two

instalments and the subscriber gets only the amount of deposit excluding

.'-

F the processing charges and maintenance charges. [87-F, G; 86-C-F]

3.2. The observations made

by this court in the context of

Para­

graphs 6 & 12 of the 1987 Directions, are equally applicable in respect of

the directions contained in Paragraph

4A introduced in the 1987 Direc-

G tions, whereby the residuary non-banking companies are prohibited from

recovering any amount by-way of processing/maintenance charges or any

such charge from the depositor and are required to arrange for the

working capital from their own resources. [86-B-C]

Peerless General Finance & Investment

Co. Ltd. v. Reserve Bank of

H India, [1992] 2 SCC 343, relied on.

1

RBI v. PEERLESS GENL. FINANCE [AGRAWAL, J.] 65

4, Union of India may consider whether it would be advisable to A

create a separate instrumentality which may be entrusted with the task of

supervision

and enforcement of the provisions regulating the functioning

of these companies, The

Union Government may also consider whether the

existing provisions need to be further strengthened

so as to give greater

protection to the interests of the depositors.

In England the Banking Act,

1987 contains provisions for Deposit Protection

Scheme for the protection

of the depositors.

It may be considered whether provisions on similar lines

could be introduced here. (88-E-G]

*Reserve Bank of India v. Peerless General Finance & Investment

Co.

B

Ltd., (1987] 2 SCR 1, referred to. C

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 37 of 1996.

From the Judgment and Order dated 3.5.95 of the Calcutta High Court

in C.O. No. Nil of 1993.

H.N. Salve, H.S. Parihar, Kuldeep S. Parihar, and Ch. Mukund Murty for

the appellants.

Somnath Chatterjee, R.F. Nariman,

B. Lahiri, A. Chaterjee and

S.

Sukumaran for Mis. JBD & Co. for the Respondent No. I

N.N. Gooptu, West Bengal, Ms. Radha Rangaswamy for Peerless Officers

Association.

Ashok Desai, S. Sukumaran and Ramesh Babu M.R. for the Respondents.

Praveen Kumar for the Intervenor.

The Judgment of the Court was delivered by

S.C. AGRAWAL, J. Special Leave granted.

D

E

F

This appeal directed against the judgment of the Calcutta High Court

dated May

3, 1995, is in the third round of the litigation between the

Peerless G

General Finance & Investment Company Ltd. (hereinafter referred to as 'Peer­

less') and the Reserve Bank of India (hereinafter referred to as 'the Bank').

Peerless was incorporated in 1932 as a limited company under the

provisions

of the Indian Companies Act, 1913 with the name

Peerless General

Insurance

and Investment Company Ltd. It was carrying on life insurance

lI

A

B

c

D

E

F

66 SUPREME COURT REPORTS [1996] 1 S.C.R.

business. After the enactment of the life Insurance Corporation Act, 1956

Peerless could not carry on life insurance business and if changed its. name

to 'Peerless General Finance and Investment Co. Ltd.' and is now carrying

on finance and investment business.

It offers small saving schemes to the

public

at large wherein the subscribers are required to pay a fixed amount as

subscription on yearly, half-yearly or quarterly basis for a fixed number of

years and oh the expiry of the said period, the subscriber is paid a sum of

money called Endowment sum, which is the face value of the certificate, and

certain additional amounts

by way of bonus. The said scheme offered by

peerless are some what similar to Recurring Deposit schemes run by commer­

cial banks.

The business transacted

by the banking companies is regulated by the

banking Regulation

Act, 1949.

Since non-banking companies started receiv­

ing deposits from general public on a large scale, it became necessary to

make suitable provisions for regulating the sani"e. The Reserve Bank of India

Act, 1934 (hereinafter referred

to as 'the Act') was amended by Act No. 55 of

1963 and chapter III-B (Sections 45 (H) to 45(Q) which contains provisions

relating to non-banking institutions receiving deposits and

finanCial i?-stitu­

tions was inserted in the Act. In Section 45-I various expressions, viz.,

'Company 'Corporation', 'Deposit', 'Financial institution', 'firm' and 'non-

banking institution' have been defined Section 45-J empowers the Bank to

regulate or prohibit the issue of prospectus or advertisement by a non­

banking institution soliciting deposits

of money from the public. 45-K ena-

bles the Bank

to collect information from non-banking institutions as to

deposits and to give directions to

such institutions. Section 45-L empowers

the Bank

to call for information from financial institution and to give direc-

tions

to such institutions.

Section 45-Q provides that the provisions of Chap­

ter -III B shall have effect not-witl1standing anything inconsistent therewith

contained in any other law for

the time being in force or any instrument

having effect by virtue of any such law. After the insertion of Chapter III-B in

the Act, the Bank issued three sets of directions to regulate acceptance of

deposits by non-banking companies, categorising them into financial, non-

G financial and miscellaneous companies. Non-Banking Financial Companies

(Reserve Bank) Directions, 1966 related to companies (other than an insur­

ance company, or stock exchange or stock broking company) engaged in

hire-purchase finance, housing finance, investments, loan equipment

leasing,

mutual benefit business etc. Non-Banking Non-Financial Companies (Re-

H

serve Bank) Directions, 1966 related to a company which was not a banking

t-

•

RBI v. PEERLESS GENL. FINANCE [AGRAWAL, J.] 67

company nor a financial company

refeITed lo above. Miscellaneous Non- A

Banking Companies (Reserve Banking) Directions, 1973 related to a com­

pany engaged in the business

of collecting moneys in one lunipsum or

otherwise by sale of units, certificates or other instruments and utilising the

moneys so collected for giving to a specified number of subscribers by lot or

draw, prizes or gifts etc. and refunding the money with or without interes

to

those who have not won any prize etc., or conducting any other form of chit

B

or kuri or any other similar business. It was found that a vast majority of the

non-banking companies accepting deposits were non-financial companies

and in order to more effectively regulate the deposit accepting activities of

these companies, the Companies (Amendment) Act, 1974 was enacted and

Sections 58-A and 58-B were inserted

10 the

Companies Act, 1956. Section 58-A makes provisions for regulating the

acceptance of deposits

by such non-banking non-financial companies and

vests the said power in the Central Government.

In Delhi Cloth and general

Mills

Etc. v.

Union of India Etc., [1983] 3 <SCR 438 this Court has upheld the

validity

of Section 58-A and has rejected the contention that it was violative

of the rights guaranteed under Articles 14 and 19(1)(g) of the Constitution.

After the issuance of the Miscellaneous Non-banking Companies (Re­

serve Bank) Directions, 1973,

Peerless sought exemption from complying

with the said directions

and such exemption was granted to it by the Banking

from

the provisions of

Paragraph 4 of the said directions in so far as those

provisions restricted the acceptance

of subscriptions under the schemes

·Upto

25% of the paid-up capital and free reserve fund. While granting this

exemption certain conditions were, however, imposed.

In 1974, a study group

headed

by Dr. J.S. Raj was appointed by the Bank to examine the existing

statutory provisions with a view

to assessing their adequacy in regulating the

conduct

of business by non-banking companies in the context of the

monetary and credit policy laid down

by the Bank from time to time and to

suggest measures for further tightening up the provisions as to ensure that the

activities

of such companies, in so far as they pertained to the acceptance of

deposits, investments, lending operations etc. sub.served the national interest

and served more effectively as adjuncts to the regulation of the monetary and

credit policies

of the country besides affording the degree or protection to

the depositors' moneys. Having regard to the recommendations of the Raj

Committee, the Bank, in 1977 issued the Miscellaneous Non-Banking Com­

panies (Reserve Bank) Directions, 1977 and the non-Banking Financial

Companies (Reserve Bank) Directions, 1977.

In the Miscellaneous Non:

c

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F

G

H

A

B

c

D

E

F

G

68 SUPREME COURT REPORTS (1996] 1 S.C.R.

Banking Companies (Reserve Bank) Directions , 1977, there was departure

from the earlier directions

of 1973 in the sense that for the first time a ceiling

was fixed in respect oi the

period for which deposits could be accepted and

that the said period could not be more than thirty

six months. Peerless

applied

to the Bank for being granted exemption from the provisions of the

said Directions

of 1977. While the said matter was pending, the

Prize Chits

and Money Circulation Schemes (Banning) Act, 1978 was enacted by

Parliament and it came into force with effect from December 12, 1978. The

Bank took the view that the schemes conducted

by Peerless were covered

by the provisions of the said Act and as Peerless, was prohibited from doing

fresh business it was required to wind up its existing business under the Act.

The Bank was of the view that there was no question of granting any

exemption to Peerless from the provisions of the Directions of 1977. The

Bank, however, considered the claim

of Peerless for exemption on merits and

four.d that it was necessary

to cancel the exemption already granted. There­

upon Peerless filed a writ petition in the Calcutta High Court for a declaration

that the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 did

not apply lo the business carried on by it. The said writ petition of Peerless

was allowed by a Division Bench of the Calcutta High Court and it was

declared that the business carried on by Peerless did not fall within the

mischief of the Prize Chits and Money Circulation Schemes (Banning) Act,

1978. The said view

of the Division Bench of the High Court was affirmed

by this Court in Reserve Bank of India v. Peerless General Finance &

Investment

Co. Ltd., (1987] 2 SCR l, (hereinafter referred to as 'Peerless!').

The Coert, after examining the various schemes offered by Peerless, held that

the said schemes were not covered

by the expression 'prize chits' as defined

in

Section 2(e) of the said Act. While upholding the decision of the Calcutta

High Court in that regard, it

was, however, observed :

"The appeals filed by the Reserve Bank of India, the Union of India

and the Slate of West Bengal are accordingly dismissed. It is open

to them to take such steps as are open to them in Jaw to regulate

schemes such

as those run by the Peerless Company to prevent

exploitation

of ignorant subscribers. Care must also be taken to

protect the thousands

of

employees."

In this context, Chinnappa Reddy J. (who delivered the main judg­

ment) has referred

to the mushroom growth of financial and investment

H companies offering staggeringly high rates of interest to depositors leading

•

>

..

RBI v. PEERLESS GENL. FINANCE [AGRAWAL, J.] 69

the court to suspect whether these companies are not speculativ~ ventures

floated to attract unwary and credulous investors and capture their savings

and had said :

"It does not require much imagination to realise the adventurous and

precarious character of these businesses. Urgent action appears to be

called for

to protect the public. While on the one hand these

schemes encourage-two vices affecting public econo1ny, the desire

to make

quick and easy money and the habit of excessive and

wasteful consumer spending, on the other hand the investors who

generally belong

to the gullible' and less affluent classes have no

security whatsoever. Action appears imperative." (p.46)

Khalid,

J, in his concurring Judgement, has expressed the same senti­

ments when he said :

"I share my brother's concern about the mushroom growth of

financial companies all over the country. Such companies have

proliferated. The victims

of the schemes, that are attractively put

forward in public media, are mostly middle class and lower middle

class people. Instances are legion where such needy people have

been reduced penniless because

of the fraud played by such financial

vultures.

It is necessary for the authorities to evolve fool-proof

schemes

to see that fraud is not allowed to be played upon persons

who are not conversant with the practice of such financial enterprises

who pose themselves as benefactors of

people." (P. 12)

Keeping in view the observations

of this Court in peerless I, the Bank

issued Residuary Non-Banking Companies (Reserve Bank) Directions, 1987

(hereinafter referred

to as the '1987 Directions') vide notification dated May

15, 1987. The said directions are stated to have been issued in exercise of

the powers conferred by Sections 45-J and 45-K of the Act.

Paragraph 2 of

the 1987 Directions prescribes that the Directions are applicable to every

residuary non-banking institution, being a company, which receives any

deposit under any scheme or arrangement by whatever name called, in one

lumpsum or

in instalments by way of contributions of subscriptions or by sale

of the units or certificates or other instruments, or in any other manner and

which, according to the definitions contained in Non-Banking Financial

Companies (Reserve Bank) Directions, 1977

or, as the case may be, the

Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977,

is

A

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70 SUPREME COURT REPORTS [ 1996] 1 S.C.R.

A not an equipment leasing co1npany, a hire purchase finance company, a

housing finance company, an insurance company, an investment company, a

loan company. a mutual benefit financial company and a miscellaneous non­

banking company. Paragraph 4 initially provided that on and from 15th May,

1987,

no residuary non-banking company shall receive any deposit repay-

B

able on demand or on notice or after a period of less than 12 months or more

than

120 months from the date of receipt of such deposit, or renew any

deposit received by it whether before or after that date, unless such deposit,

on renewal,

is repayable not earlier than 12 months and not later than

120

months from the date of such renewal. Paragraph 5 prescribes that the

minimum rate

of return, shall not be less than the amount calculated at the

C

<ate of 10% per annum (to be compounded annually) on the amount

deposited.

By way of security for depositors. Paragraph 6 made provision

regarding investment of the amounts which are received by a residuary non-

D

E

F

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H

banking company in the following terms : '

"6. On and from 15th May, 1987.

(1) every residuary non-banking company shall deposit and

keep deposited the fixed deposits with public sector banks or invest

and keep invested in unericumbered approved securities (such

securities being valued at their market value for the time being), or

in other investments, which in the opinion of the company are safe,

a sum which shall not, at the close of business on 31st December

1987 and thereafter

at the end of each half year that is

30th June 31st

December be less than the aggregate amounts

of the liabilities to the

depositors whether or not such amounts have become payable;

Provided that of the sum

so deposited or invested.

(a) not less than

10 per cent shall be in fixed deposits with any of

the public sector banks;

(b) not less than 70 per cent shall be in approved securities;

(c) not more than 20 per cent or ten times the net owned funds of

the company, whichever amount is less, shall be in other investments.

Provided that such investments shall be with the approval of the

Board

of Directors of the

Company.

RBI v. PEERLESS GENL. FINANCE [AGRAWAL, J.] 71

x x x x x x x x"

Jn Paragraph 7 provision is made for abolition of forfeiture and it is

directed that on and from 15th May, 1987 no residuary non-banking com­

pany shall forfeit

any amount deposited by a depositor, or any interest,

premium bonus or olher advantage accrued thereon. Paragraph 8 prescribes

the particulars to be specified in an application form soliciting deposits.

Paragraph 9 requires that every residuary non-banking company shall furnish

to

every depositor a receipt for every amount which has been or which may

A

B

be received by the company by way of deposit before or after the commence­

ment of the

1987 Directions. Paragraph

10 makes provision for keeping

register/registers of deposits and particulars

to be entered therein. Paragraph C

11 prescribes information which must be included in the report of the

Board

of Directors that is laid before the company in general meeting. Paragraph 12

provides as under :

"Every residuary non-banking company shall disclose as liabilities

in its books of accounts and balance sheets, the total amount of D

deposits received together with interest, bonus, premium or othe1

advantage, accrued or payable to the depositors."

Paragraph 13 prescribes that copies of the audited balance sheet and

the profit and loss account together with a copy of the report of Board of

Directors should be furnished to the Bank within 15 days of the meeting of

the company under Section 217(1) of the Companies Act, 1956. Paragraph

14 requires a residuary non-banking company to submit to the Bank returns

furnishing information on matters specified

in the Schedule to the Directions.

Paragraph

16 makes provision regarding advertisments and statements in lieu

E

of advertisement which are issued by a residuary non-banking company. F

Paragraph 19 empowers the Bank, if it considers it necessary for avoiding any

hardship or any other just and sufficient reason, to grant extensions of time

to comply with or exempt any company or class of companies, from all or

any

of the provisions of the Directions either generally or for any specified

period subject

to such conditions as the Bank may impose. Paragraph

20 lays

down that nothing contained in Paragraph

19 of the Non-Banking Financial

Companies (Reserve Bank) Directions, 1977 shall apply

to the residuary non-

banking companies.

G

After the issuance of the 1987 Directions, Timex General Finance &

Investment Co. Ltd. filed a writ petition challeging the validity of the said H

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72 SUPREME COURT REPORTS [1996] l S.C.R.

directions before tl1e C1!cutta High Court. The said writ petition was dis­

posed

of by a Division Bench of the

Calcutta High Court whereby certain

directions were given to the Bank

to modify the 1987 Directions and make

them reasonable and workable to safeguard the interest

of depositors and

protect the employees. After the said decision,

Peerless got itself impleaded

as a party-respondent in the said writ petition and obtained further directions

from the High Court. The said orders of the High Court were challenged by

the Bank before this Court. Peerless also filed a writ petition under Article

32

of the

Constitution challenging the validity of the 1987 Directions. The

appeals

of the Bank as well as the writ petition filed by

Peerless were

disposed of

by this

Court by its judgment in Peerless General Finwice and

Investment Co. Ltd. & Anr. v. Reserve Bank ~f India, (1992] 1 SCR 406,

(hereinafter referred to a 'peerless II').

In Peerless II the main controversy centred round Paragraphs 6 and 12

of the 1987 Directions. It was urgerl that the 1987 Directions were ultra vires

D the power conferred on the Bank by Sections 45-J and 45-K of .the Act

inasmuch as none of these sections authorises the Bank to frame any

directions prescribing the manner of investment of deposits received of the

method of accountancy to be followed or the manner in which its balance

sheets and business

of accounts are to be drawn up. The said contention was

E

F

G

negatived by this

Court. Kasliwal J. has held that the Bank was competent

and authorised

to issue the 1987 Directions in exercise of powers conferred

under Section 45-K(3)

of the Act which confers a wide power on the Bank

to give any direction in respect

of any matter relating to or connected with

the receipt of deposits and that under the said provision the Bank

is entitled

to give directions with regard to the manner in which the deposits are to be

invested and also the manner

in which such deposits are to be disclosed in

the balance sheets or books of accounts of the company. Ramaswamy J., in

his concurring judgment, while agreeing with the view of Kasliwal J. that the

directions could be upheld under Section 45-K(3), has further held that the

directions could also be upheld under Section 45-L

of the Act.

As regards the challenge to the validity

of the provisions contained in

paragraphs 6 and 12 of the 1987 Directions, on the ground of being violative

of the right guaranteed under Article l9(1)(g) of the

Constitution, it may be

stated that Peerless was following the actuarial method which is adopted by

H insurance companies and was treating a certain percentage of the amount

'

I

·•

RBI v. PEERLESS GENL. FINANCE [AGRAWAL, J.] 73

collected by way of each instalment under the certificates of deposits as part A

of the income and it was retained and taken to the profit and loss account

and

it was utilised for payment of commission to the agents and for incurring

other expenses. Since such a course was impermissible under

Paragraphs 6

and 12 of the 1987 Directions, the validity of the said directions was

challenged on the ground that the same were violative

of the right guaranteed B

under Article 19(l)(g) of the Constitution.

On behalf of Peerless it was

submitted that it

is inherent in the business carried

·on by Pe~rless and other

residuary non-banking companies that Lhe working capital is generated out

of the subscriptions received from the certificate holders and such business

comprises in collecting subscriptions from depositors either in lumpsum or

in instalments and such deposits are paid back with the guaranteed accre­

tions, bonus, interest, etc. in terms of the contract at the end of the stipulated

term and through business such companies have rendered great and com­

mendable service to the nation in 1nobilising small savings and giving a

boost to the movement of capital formation in the country. Ir was submitted

that though interest

of depositors is an important consideration but the said

interest is not impaired in any manner whatsoever by the method of account-

c

D

ancy that was being followed by

Peerless and by all similar companies

namely, appropriation

of a part of the subscription to the profit and loss

account and meeting the working capital requirements out of the same.

Arguments were also advanced on behalf of All India Field Officers Associa-E

tion which claimed

to represent 14 lac field officers engaged by

Peerless on

the basis

of individual contracts of engagements. It was submitted that they

earn their livelihood solely

by Collecting business for

Peerless and for

collecting such business Peerless pays them commission at a contractual

agreed percentage on the value

of business collected and that the said field F

officers have to meet all expenses for procuring such business such as

travelling expenses, boarding, lodging, office and administrative expenses

etc. out

of such commission and they have to under take Jong tours and have

to travel into remote villages

to reach the small depositors. It was submitted

that

if the 1987 Directions were upheld, the undertaking of

Peerless will face G

inevitable closure and almost 14 lac field officers will lose their only source

of livelihood and will be virtually thrown on the streets and thus any

restriction which would be prohibitive or which would result in closure

of

the undertaking of

Peerless would be against public interest. The said

contentions were rejected by the Court.

It was held :

H

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74

SUPREME COURT REPORTS

KASLIWAL, J.

[1996] 1 S.C.R.

"Jn our view the Reserve Bank is right in taking the stand that if

these companies want

to do their business, they should invest their

own working capital and find such resources elsewhere with which

the Reserve Bank has no

concern". (P. 445)

"We cannot 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 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 because 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 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". (pp. 447-

448)

RAMASWAMY,J.

"No-one can have fundamental right to do any unregulated business

with the subscribers/depositor' money. Even the banks or the financial

companies are regulated

by ceiling on public deposits fixing nexus

between deposits and net-worth

of the company at the ratio of 3 :

1, i.e. 25% of the capital net-worth. No

·one would legitimately be

expected

to get immediate profits or dividend without capital

investment. The concept

of profit or interest pre-supposes capital

investment." (P.461)

The Court rejected the contention that in case the impugned directions

are not struck down, peerless will have

to close down its business and several

thousands

of employees and their families and several lakhs of field agents

would be thrown on the streets and left with

no employment. It was observed

by Kasliwal, J. :

"We are not impressed with the argument of Mr. Somnath Chatterjee,

. ·

,

RBI v. PEERLESS GENL. FINANCE [AGRAWAL, J.] 75

Learned Senior Advocate for the Peerless that after some years the A

Peerless will have to close down its business if directions contained

in paragraphs 6 and 12 are to be followed. The working 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." (p .

448)

B

"Paragraph 5 of the directions relates to the minimum rate of return C

fixed at 10% per annum for a deposit with a maturity of 10 years.

It is a matter of common Knowledge that in the present times even

the public sector corporations

and banks and other financial and

non-financial companies pay interest at much more higher rates

ranging from 14 to 18%. Thus according 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." (p. 444)

Similarly, Ramaswamy

J. has said :

"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 Lhe business management

of every

R.N.B.C. It also, thereby, protects interest of the employees/

D

E

field staff/commission agents etc. as on permanent basis overcoming

initial conclusions.

It was intended, in the best possible manner, to

subserve the interest of all without putting

any prohibition in the F

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." (p.462)

After

the said decision in Peerless II upholding Paragraphs 6 and 12 of

the 1987 Directions, Peerless has resorted to the course of splitting up the G

amounts received in respect of the first two instalments in the scheme. By

way of illustration we would refer to their scheme in Table 23.

·Under this

Scheme endowment amount was Rs. 1400 payable on maturity after 10 years

and the yearly instalment

was Rs.

100. Out of the sum of Rs. JOO received

by way of first and second instalments, Rs. 70 was treated as deposit in each H

76 SUPREME COURT REPORTS [1996] I S.C.R.

A of the two years. The balance amount of Rs. 30 out of the first instalment was

credited

as processing charges and the balance amount of Rs.

30 out of the

second instalment was credited as maintenance charges. On maturity the

subscriber was entitled to be paid Rs. 1400 as endowment sum and an

additional amount of Rs. 353 as bonus. The case of Peerless is that the two

B

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amounts of Rs. 30 each which were retained by way of processing charges

and maintenance charges were not part of deposit and it was not necessary

for Peerless to comply with the directions contained in paragraphs 6 and 12

of the 1987 Directions in respect of the said s.ums. In order to cover up this

mode

of avoiding compliance with the requirements of Paragraphs 6 and 12

of the 1987 Directions, the Bank, by notification dated April 19, 1993,

amended the 1987 Directions and inserted Paragraph 4A which contains the

following provision :

"4A. No residuary non-banking company shall take from any deposi­

tor/subscriber

to any schemes run by the company, with or without

his consent, any amounts towards processing or maintenance charges

or any such charges, by whatever natne called, for meeting its

revenue expenditure.

Provided that a company may charge to a new depositor a one

time initial sum

not exceeding Rs.

10 towards cost or expenses for

issuing brochures/application form, servicing the depositors' account,

etc."

. By notification dated April 10, 1993, Paragraph 4 was also amended

and on and from April 12, 1993 the maximum period

for deposits was

reduced from

120 months to 84 months.

Feeling aggrieved

by the said amendments introduced in the 1987

Directions,

Peerless filed a writ petition, being C.O. No. 21038(W) of 1993,

in the Calcutta High Court to assail the validity of the said amendments. The

said writ petition has been partly allowed by the learned Single Judge of the

High Court by the impugned judgment dated May 3, 1995. The High Court

has upheld the validity of the notification dated April 10, 1993 whereby the

maximum period

of deposits was reduced from

120 months to 84 months and

it has been held that the Bank was competent to make the said amendment

in view of the powers conferred on it under Section 45-K(3) of the Act. The

High Court has, however, held that the notification dated April 19, 1993

whereby Paragraph 4A was introduced in the 1987 Directions was ultra vires

I

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•

RBI E PEERLESS GENL. FINANCE [AGRAWAL, J.] 77

the powers conferred on the Bank and that the Bank

was not

competent· to A

issue such a notification under Sections 45-J, 45-K or 45-L of the Act. Hence

this. appeal.

The firsl question which requires consideration is whether in exercise

of the powers conferred on it by the Act the Bank is competent to issue

the

notification dated April I 9, I 993 inserting Paragraph 4A in the I 987

Directions. Shri Harish N. Salve, the learned senior counsel appearing for the

Bank, has submitted that. the direction contained in Paragraph 4A could be

given by the Bank

in exercise of the power conferred on it under sub-section

(3)

of

Section 45-K and, in the alternative, Shri Salve has urged that, insofar

B

as Peerless is concerned, since it is a financial institution as defined in clause C

(c) of Section 45-1 of the Act, the directions contained in Paragraph 4A could

be given in exercise of the power conferred on the Bank under Section 45-

L

of the Act. We will first examine the provisions of

Section 45-K(3) of the

Act which reads as under :

'45-K(3). The Bank may,

if it considers necessary in the public D

interest so to do, give directions to non-banking institutions either

generally or to any non-banking institution or group of non-banking

institutions in particular, 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 E

be received."

According to the High Court,

Section 45-K(3) cannot be invoked for

two reasons, namely, (i) Paragraph 4A makes provisions regarding recovery

...., of processing charges or maintenance charges which cannot be regarded as

a 'deposit' as defined

in clause (bb) of

Section 45-1; and (ii) the words "in F

respect

of any matters relating to or connected

with" in Section 45-K(3) have

to be construed in a restricted sense in view of the words "including the rates

of interest payable on such deposits, and the periods for which deposits may

be received."

. Shri Salve has submitted that the object underlying the enactment of G

Section 45-K (which is part of Chapter III B) is to regulate the conditions on

which deposits may be accepted

by non-banking companies or institutions

and

to prevent malpractices and with that end in view very wide powers have

been conferred on the Bank to give directions under

Section 45-K(3) of the

Act. The submission

of

Shri Salve is that in Peerless II this Court has upheld H

78 SUPREME COURT REPORTS [1996] I S.C.R.

A the directions contained in Paragraphs 6 and 12 of the 1987 Directions and

that the directions that arc contained

in Paragraph 4A are designed to prevent

the evasion

of the directions contained in

Paragraphs 6 and 12 and to make

them effective and that the power

Lo issue directions contained in Paragraphs

6 and 12 wou]d necessarily enco1npass the power to issue directions to ensure

B

that they are not avoided by contrivances or devices which essentially

involve a change in nomenclature. Shri Salve has further submitted that the

expression 'deposit' as defined

in clause (bb). of Section 45-I has been

defined in very wide terms to include. receipt

of money by way of deposit

or loan or in any other form and since the said definition is contained in an

enabling,statute, it would be inappositc to construe the words used in the said

C definition in a restrictive sense particularly, when there are provisions

expressly excluding a number of items which would otherwise fall within the

definition which clearly indicates that the legislature intended

to use the

expression in its widest sense as including receipts which may be revenue in

nature. Shri Save has also contended that the words

"in respect of any matters

D or connected with the receipt of deposits" in Section 45-K (3) are of very wide

amplitude and they cannot be restricted

by the words which follow these

words.

Shri Somnath Chatterjee, the learned Senior counsel appearing for

Peerless, has, on the other hand,

supported the judgment of the High .Court

E and has urged that deposit means a sum of money received with a correspond­

ing obligation to repay the same and that processing/maintenance charges

recovered by Peerless, being non-refundable in nature, cannot be deposits.

Shri Chatterjee has argued that the words "any other form" in the definition

of 'deposit' contained in Clause (bb) of Section 45-I has to be construed

F

ejusdem generis with words "deposits or)oan" which precede these words. In

the alternative. Shri Chatterjee has invoked the rule of Noscitur-a-Sodis and

that since the words "any other form" occur in the company of the words

"deposit or loan" they mean other forms of payment which are refundable. As

regards the words "relating to or connected with the receipt of deposits" in

Section 45-K (3) of the Act, the submission of Shri Chatterjee is that the

G words "including rates of interest payable on such deposits and the period

for which deposits have been received" which follow -these words indicate

that-the preceding words have been used in a restricted sense or otherwise

there was no need to use the other words which follow them.

While construing the ambit

of the power conferred on the Bank under

H Section 45-K(3), We cannot lose sight of the object underlying the said

-·

RBI v. PEERLESS GENL. FINANCE [AGRAWAL, J.] 79

provision. Section 45-K is part of Chapter III-B which was inserted in the Act

by Act No. 55 of 1963. In the Statement of Objects and Reasons appended

to the Bill it was expressly mentioned that "it is desirable that the Reserve

Bank should

be enabled to regulate the conditions on which deposits may

be accepted

by these non-banking companies or institutions". In the

State­

ment of Objects and Reasons, hope was expressed "that the Reserve Bank will

be able to prevent malpractices, if any, to stop unhealthy competition for

deposits, and to prescribe and enforce reasonable conditions including

realistic rates of interest, disclosure of any information or particulars in which

the depositors n1ay be interested, pn?vision for returning of money to them

A

B

.-J in certain contingencies and other relevant matters". It would thu~ appear that

Section 45-K(3) is an enabling provision enacted to empower the Bank to C

regulate the conditions on which deposits may be accepted by non-banking

companies or institutions and to prevent malpractices in the matter of

ace~ptance of such deposits. Such an enabling provision must be so con­

strued as to subserve the purpose for which it has been enacted. It is a well

accepted canon

of statutory construction that

"it is the duty of the court to D

' further Parliament's aim of providing a remedy for the mischief against which

the enactment is directed and the court should prefer a construction which

advances this object rather than one which attempts to find some way of

circumventing it. [See : Franl·is Bennion on statutory Interpretation, 2nd

Edn. p. 711)

This words "in respect of any matters relating to or connected with the

receipt of deposits" in Section 45-K(3) are of wide amplitude. Shri Chatterjee

E

• sought to cut down their amplitude by reference to the judgment of this

Court in Madhav Rao v. Union of India, [1971] 3 SCR. 9, wherein the

--.

expression "provisions of this Constitution relating to" in Article 363 of the

Constitution has been construed to mean "provisions having a dominant and

immediate connection with" and "it does not mean merely having a reference

to". [p.96). We are unable to agree. The decision in Madhav Rao v. Union

F

of India (supra) was given in the context of the provisions of Article 363

which excludes the jurisdiction

of the Court and it was observed that the

principle that a provision which purports

to exclude the jurisdiction of the G

courts in certain matters and so deprives the aggrieved party of the normal

remedy

will be strictly construed,

"is a principle not be whittled down" (p.

95).

In that case, the Court has emphasised :

"The meaning of a word or expression used in the Constitution often

is coloured by

the context in which it occurs : the simpler and more H

80

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SUPREME COURT REPORTS [1996] 1 S.C.R.

common the word or expression, the more meanings and shades of

meanings it has.

It is the duty of the Court to determine in

what

particular meaning and particular shade of meaning the word or

expression

was used by the Constitution makers, and in discharging

the

duty the Court will take

·into account the context in which it

occurs, the object

to serve which it was used, its collocation, the

general congruity with the concept or object it was intended to

articulate and a host of other considerations." (pp. 95-96)

Moreover, in

Peerless II, this Court has construed the expression "in

respect of any matters relating to or connected with the receipt of deposits"

C in Section 45-K(3) of the Act and has held :

D

E

F

G

H

"It (Reserve Bank) can also give directions to non-banking institution

in respect of any matters relating to or connected with the receipt

of deposits, including 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

relpect of any matters relating to

or connected with the receipt ()f deposits (emphasis added). In our

vie\' a very wide power is given to the Reserve Bank of India to

issue directions in respect of any matters relating to or conne~ted

with the receipt of depasits. 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 linked with the capital of the company. Such interpretation would

be violating the language of Sec. 45-K(3) which furnishes a wide

pawer

to the Reserve Bank to give any directions in respect of any

matters relating 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 manner in which such deposits 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 above provision is of great significance and in our

view the impugned directions of 1987 are fully covered under Sec.

45-K(3)

of the Act, which gives power to the reserve Bank to issue

such directions.

" (pp. 430-31)

RBI v. PEERLESS GENL. FINANCE [AGRAWAL, J.J 81

It is thus evident that the words "in respect of any matters relating to A

or connected with the receipt of deposits" in Section 45-K(3) confer a wide

power on the Bank to issue directions and the said power is not restricted or

limited to receipt of deposits only. The amplitude of this power cannot be

curtailed

by the words

"including the rates of interest payable on such

deposits

and the periods for which deposits may be

received" in Section 45-

K(3). 11 is no doubt true that the word "including" is generally used in

extensive sense to bring within the ambit of the provision matters referred to

B

in the inclusive clause which normally would not have been covered by the

provision. But that is not always so. Many times the Legislature uses an

inclusive phrase to specifically include a matter by way of abundant caution.

Having regard

to the object and purpose underlying the enactment of Section C

45-K, we are unable to construe the words

"including the rate of interest

payable

on such deposits and the periods for which deposits may be received" as restricting the ambit of the words "in respect of any matters

relating to or connected with the receipt of deposits", which, in our opinion,

therefore the words must be given their natural meaning as construed by this D

Court in Peerless II. This means that the Bank has been given the power to

issue directions in respect of any matter relating to or connected with the

receipt of deposits.

The processing/~intenance charges or other similar charge received

by a non-banking company from the sub-scriber to the schemes are received E

with the avowed purpose

of processing and maintenance of the deposits by

the subscriber under the scheme, these amounts are received as part of the

instalments paid

by the subscriber.

Tliey are undoubtedly, related to and

connected with the receipt

of deposits and it is not possible to say that the

said chargee are not matters related

to or connected with the receipt of

deposits.

Paragraph 4A which prohibits receipt by a non-banking company

from any depositor/subscriber

to any scheme run by the company, with or

without

his consent, any amount by way of processing/maintenance charges

F

or any such charge, by whatever name called, for meeting its revenue

expenditure, is, therefore, a provision containing directions in respect of

matters relating to or connected with the receipt of deposits by a non-G

banking company.

In this context, it

would also be relevant to mention that in Peerless

II this Court has upheld the directions contained in Paragraphs 6 and 12 of

the 1987 Directions. The directions which are contained in Paragraph 4A,

introduced

by way of amendment by notification dated April 19, 1993, seek H

82 SUPREME COURT REPORTS [1996] l S.C.R.

A to plug the loopholes by which the directions contained in Paragraphs 6 and

12 were sought to be evaded and circumvented. Paragraph 4A thus seeks to

prevent evasion of the directions contained in Paragraphs 6· and 12 of the

directions.

If the Bank is competent to give the directions contained in

Paragraphs 6

and 12 of the 1987 Directions, it stands to reason that the Bank

B

should be competent to give directions which would prevent

evasiQ~·of those

directions and secure their effective implementation. Section 45-K is in the

nature

of an enabling provision. In the matter of construction of enabling

statutes the principle applicable is that if the Legislature enables something

to be done, it gives power at the same time, by necessary implication, to do

everything which is indispensable for the purpose of carrying out the purpose

C in view.

[See : Craies on Statutes, 7th Edn. p. 258.] It has been held that

the power

to make a law with respect to any subject carries with it all the

ancillary and incidental powers

to make the law effective and workable and

to prevent evasion.

[See : Sodhi Transport Company v. State of UP., [ 1986]

D

E

F

G

H

1 SCR 939 at pp. 947-48] ""

It must, therefore, be concluded that Paragraph 4A, which has been

. inserted by notification dated April 19, 1993 in the 1987 Directions, falls

within the power conferred on the Bank

to issue directions under

Section 45-

K(3) of'ti\~ Act and the High Court was in error in holding that the said

provision is ultra vires the power conferred on the Bank

by the Act. In that

view of the matter, we do not consider it necessary to go into the question

whether the processing/maintenance charges received by Peerless from the

subscribers under the schemes can

be regarded as

·deposit' as defined in

clause (bb)

of

Section 45-I of the Act. For the same reason it is not necessary

to go into the question whether the said direction could be sustained under

Section 45-L of the act.

We may now examine whether Paragraph 4A is violative of the

provisions

of Articles 14 and 19(l)(g) of the Constitution.

Shri Chatterjee has urged that Paragraph 4A is violative of the right to

equality guaranteed under Article 14 for the reason that (i) it fixes a uniform

maximum ceiling of Rs. 10 towards cost or expenses for issuing brochure/

application

form, servicing the depositors account, etc., irrespective of the

volume of business transacted, quality of services rendered, the level of

tech­

nology adopted in the matter of rendering services etc. and thereby unequals

are treated equally; and (ii) though stringent restrictions have been imposed on

recovery of service charges

by Peerless and other residuary non-banking

com-

..

...

RBI v. PEERLESS GENL. FINANCE [AGRAWAL, J.] 83

panies, no similar control has been exercised by the Bank in respect of levy of A

service charges by others si1nilarly siluate, na1nely, comn1crcial banks. As

regards the first ground of challenge based on the principle lhat discri1nination

may result by unequals being treated equally, it may be stated that equal

treatment of unequal objects, transactions or persons

is not liable to be struck

down as discri1ninatory unless there is si1nultaneously absence

?f a rational B

relation to the object intended to be achieved by the law. (See : Jalan Trading

Co. (P) Ltd. v. Mill Mazdoor Union, [1967] l SCR 15 at p. 36).

The uniform amount

of Rs.

10 that has been prescribed in paragraph

4A

is for the expenses for brochure/application form and for servicing the

depositors' account which would be incurred by the residuary non-banking

C

companies in respect of their schemes. The said charges would not vary from

person to person and would normally be the same

in all cases and therefore,

the fixation

of a uniform amount of Rs.

10 which can bi;..charged by a

company does not mean that paragraph 4A inserted in the 1987 Directions

suffers from the vice of discrimination on the ground that unequals are being

treated equally.

The other ground of discrimination based on non-banking companies

being treated differently from commercial banks

in the matter of service

charges, is also without substance.

Shri Chatterjee has invited our attentiOn

D

to the documents filed as Annexure - E (colly.) to the supplementary affidavit E

of Shri Patil Pavan Roy filed on behalf of the respondents which show that

certain foreign banks demand service charges for the services rendered

by

them to the account holders. The said documents relate to current account

or savings bank accounts. No document has been brought to our notice

which may show that commercial bank levy service charges

in respect of a

recurring deposit scheme similar to that operated by

Peerless. Therefore, it

cannot be said that there is discrimination between persons similarly situate

in the matter of receipt of service charges for the deposits and paragraph 4A

cannot be held

to be violative of Article 14 of the Constitution on that

account.

F

G

Assailing the constitutional validity of the directions contained in

Paragraph 4A on the ground that the same are violative of the right

guaranteed under Article 19( l )(g) of the Constitution,

Shri chatterjee has

submitted that the processing charges and maintenance charges that are

received by Peerless from the depositors/subscribers in connection with the

schemes are for the purpose of meeting the expenses that are incurred by H

84 SUPREME COURT REPORTS (1996] l S.C.R.

A Peerless for operating the said schemes and to pay commission to the agents

who secure the deposits, and that

if

Peerless is deprived of these funds, it

would not be possible for it to carry on its business. Shri Chatterjee has

pointed that und~r the scheme in Table 23, that was being operated by

Peerless after the decision in Peerless II, the endowment sum was Rs. 1400

B

and yearly instalment of Rs. JOO W3' payable for JO years. A sum of Rs. 30

was being set apart towards processing charges out of the amount of Rs. 100

received by way of first instalment and out of the amount of Rs. JOO received

by way of second instalment, a sum ~f Rs. 30. was set apart for maintenance

charges. The submission

of Shri Chatterjee is that setting apart of this

amount towards processing charges and maintenance charges did not, in any

C way, prejudicially affect the depositor/subscriber because on maturity he was

being paid the total amount paid

by him including the processing charges

and maintenance charges with interest at the rate of

10% on ·compound basis

on the whole amount paid and the fact that part of the amount raised in first

and second instalments was adjusted towards processing charges and main-

D !_enance charges did not cause any financial loss to the depositor. According

to Shri Chatterjee, the total amount of

Rs.

60 that was received by way of

processing charges and maintenance charges against the endowment sum of

. Rs. 1400 was slightly more than 4% of the whole amount. Shri Chatterjee has

also stated that after the decision

of the High Court and the interim order

E

F

G

H

passed by this Court on May 8, 1995,

Peerless has started new scheme under

Table

26 wherein endowment sum of Rs.

3500 is payable on maturity after

a period of 7 years and the yearly instalment

is Rs.

500. Rs. 90 is received

along with the first instalment

as processing charges which is not refundable. On maturity the depositor/subscriber not only gets the aforesaid endowment

sum of Rs. 3500 but he also gets a guaranteed bonus of Rs. 1717.94, maturity

bonus

of Rs.

200 and a special bonus of Rs. 175.40, i.e., a total amount of

Rs. 5593.33. It is submitted that, on maturity, the depositor/subscriber is paid

the sum of

Rs.

3500 in full as well as sum of Rs. 90 paid by him as processing

charges and

he is also paid interest at the rate of

I 0% on compound basis

per annum on the total sum

of Rs.

3500 plus Rs. 90 paid by him and an

additional amount of Rs. 200 is paid as bonus which shows that the

depositor/subscriber is, in no way, a loser in paying the processing charges

under the new scheme. The submission is that the said sum of Rs. 90 which

is paid

as processing charges is Jess than 3% of the endowment sum of Rs. 3500, and that by charging processing fee of Rs. 90 on the scheme, Peerless

would be earning a net profit of Rs. 9.75 crores on the total business of Rs.

750 crores in a year but if Peerless is restricted to recovering Rs. JO, as per

)

RBI v. PEERLESS GENL. FINANCE [AGRAWAL, J.] 85

the proviso to Paragraph 4A, it would be suffering a loss of Rs. 87 .2 crores

in a year and that it would not be possible for Peerless to carry on its business

any more and it will have to close down its business resulting in unemploy­

ment of a large number of its employees as well as nearly 14 lac field officers.

In support of his submission Shri Chatterjee has placed strong reliance on the

observations

of Chinnappa Reddy J. in

Peerless I wherein, while permitting

the Bank to take such steps as are open to it in law to regulate the schemes

such

as those

run by Peerless to prevent exploitation of ignorant subscribers,

it

was observed that

"care must be taken to protect thousands of its employ-

A

B

ees" Shri Chatterjee has also invited our attention to Regulation 50 of the

SEBI (Mutual Funds) Regulations 1993, providing for limitation of expenses

which enables the Asset Management Company

to charge the mutual fund C

with its agents' commission as part of the recurring expenses and prescribes

that

"initial expenses in respect of any one scheme shall not exceed 6% of

the fund raised under that scheme". The submission of Shri Chatterjee is that

the amount that

was being recovered by

Peerless by way of processing

charges and maintenance charges under the earlier scheme in Table

23 and D

the processing charges that are being raised under the current scheme in Table

26 are much less than 6%.

We are unable to accept these contentions urged by

Shri Chatterjee.

Similar submissions were advanced

by

Peerless before this Court in Peerless

II wherein it was submitted on behalf of Peerless that it was inherent in the E

business carried on by Peerless or other similar residuary non-banking

companies that the working capital is generated out of the subscription

received from the certificate holders and that certain portion of subscription

received

by the company was transferred to the profit and loss account and

the same was used to defray working capital requirements of the company,

viz., payment of agent's commission, management expenses, staff salaries and

other overheads. It was also urged that if

Peerless was refrained from doing

so, all the agents, officers and employees

of

Peerless would lose their jobs

and their family members would be thrown on

the streets. The said contention

was, however, rejected

by this Court. It was observed that working capital

could not be mopped

up out of depositors' money and that for the purpose

of entering this field of business a company should make arrangements on

its own resources for working capital and for meeting the expenses and it

cannot insist on utilising the money of the depositors/subscribers for this

purpose.

In this context, the Court has mentioned that under

Paragraph 5 of

the 1987 Directions the. minimum rate of interest that is fixed is 10% per

annum and that it

is common knowledge that in present times even the public

F

G

H

)

86 SUPREME COURT REPORTS [1996] l S.C.R.

A sector corporations and companies and other financial and non-financial

companies pay interest at much higher rates ranging from 14% to 18% and

that companies doing such business can easily earn a profit of 4% to 5% on

their investments.

In the context of

Peerless, which is already in th.e fieled,

the Court has observed that there

is no possibility of its closing

d~wn the

B

c

business because it has already large accumulated funds collected by making

profits in the past several years and that it has enough working capital in

order to meet the expenses. These observations made in the context of

Paragraphs 6 and 12 of the 1987 Directions are equally applicable in respect

of the directions which are contained in Paragraph 4A introduced in the 1987

Directions

by way of notification dated April 19, 1993, whereby the

residuary

non-banking companies are prohibited from recovering any amount by way

of processing charges/maintenance charges or any such· change from the

depositor and are required

to arrange for the working

cap)tal from their own

resources. The working

of Peerless and other residuary non-banking compa­

nies cannot be equated with that

of mutual funds governed by

SEBI (Mutual

D Funds) Regulations, 1993. Moreover, the schemes operated by Peerless are

also not comparable with those

of Mutual Funds. Even as

regards the

expenses, it may

be stated that under Table 23 Peerless was receiving by way

of processing charges and maintenance charges

30% of the first two

instalments

and under Table 26 it is receiving 18% of the first instalment.

E

F

G

H

It is not disputed that a number of schemes are discontinued after the

payment of one or two instalments and

the subscriber gets only the amount

of deposit excluding the processing charges and maintenance charges. The

fact that processing charges

and maintenance charges raised by Peerless are

less than

6% of the endowment sum payable on maturity cannot, therefore,

·be the basis for holding that Paragraph 4A whereby the residuary non­

banking companies are prohibited from receiving

any amount by way of

processing charges, maintenance charges or any similar charge imposes

unreasonable re.strictions on the right guaranteed under Article 19(l)(g) of the

Constitution.

Shri Chaterjee has next contended that the maximum amount of Rs. 10

that has been prescribed in the proviso to Paragraph 4A is wholly arbitrary

and totally inadequate and has

no nexus with the need of working expenses.

It has been urged that from Paragraph 4A itself it is evident that the said

amount

of Rs.

10 has been fixed per depositor to meet the cost of brochure/

application form, servicing depositors' account, etc. and that servicing

depositors' account means maintenance of the account of the depositor for

'

\--..

'·

:

RBI v. PEERLESS GENL. FINANCE [AGRAWAL, lJ 87

a period of 7 years and taking the cost of the application form/brochure, at A

a low figure of Rs. 5 less than one rupee would be available per year for

servicing the depositors' account which would be insufficient to cover the

cost of postage and stationary, including the cost of ren1inder notices for

renewal _deposits, discharge vouchers, receipt, etc.

Shri Salve has, however, submitted that the said amount of Rs. IO as B

prescribed in the proviso to Paragraph 4A is meant to cover the cost of

brochure/application form, etc. and since the case of Peerless is that the same

cost Rs. 5 only, the said amount cannot be said to be inadequate. According

to Shri Salve, by prescribing the said amount, it is not the intention to allow

the residuary non banking companies

to recover any sum for meeting the C ,

revenue expenditure of the residuary non-banking company including the

payment

of commission to its agents.

Shri Salve has also urged that no

material was placed by Peerless in their pleadings to show that the fixation

of the said amount is unreasonable or arbitrary. The question whether the

amount of Rs. IO that has been prescribed in the proviso to Paragraph 4A is

inadequate

to meet the cost of brochure/application form, and expenses

servicing charges for

depositOrs' account cannot be gone into the absence of

the necessary pleadings and material in support thereof and, therefore, it is

not possible to say that the amount of Rs. 10 that has been prescribed in

the proviso to Paragraph 4A is arbitrary or unreasonable. Peerless can make

a representation

to the Bank for the revision of the said amount in the light

of the expenses that would be incurred by it on brochure/application form

and servicing depositors' account and, if such a representation is made, the

Bank shall give due consideration to the same and, if the amount prescribed

is found to be inadequate, the Bank should revise the

same.

D

E

For the reasons aforementioned, we are unable to uphold the judgment F

of the High Court striking down Paragraph 4A introduced by notification

dated April

19, 1993. In our opinion, [it is within the competence of the Bank

to issue directions in the nature contained in

Paragraph 4A and the said

provision

is not violative of the rights guaranteed under Articles 14 and

19(l)(g)

of the Constitution.] G

During the course of his submissions

Shri Chaterjee laid emphasis on

the good record

of performance of

Peerless and has pointed out that this has

also been noticed

by this Court in the earlier judgments in

Peerless I and

Peerless IL Shri Chatterjee has submitted that having regard to the said

record, the Bank should grant exemption

to

Peerless from complying with the H

A

B

88 SUPREME COURT REPORTS [1996] 1 S.C.R.

directions contained in Paragraph 4.A. Shri Salve has disputed the said claim

of Peerless about its performance and has invited our attention to the report

of Inspection conducted under Section 45-N of the Act with respect to the

financial position

of the company as on March

:ii, 1993, which refers to

violation of various provisions of 1987 Directions. Shri Chaterjee has,

however, disputed the correctness of

the observations that have been made

in the said report. We do not propose to go into this question. It is matter

which

has to be examined by the banking in the light of the explanation that

is offered by

Peerless for the violations referred to in the Inspection Report,

The question

as to whether exemption should be granted to

Peerless under

Paragraph

19 of the 1987 Directions, is a matter for the Bank to consider and

C we do not wish to say anything in that regard.

D

It cannot be denied that residuary non-banking companies, like

Peer­

less, play a useful role in the economy by mobilising "savings by tapping that

section

of the people which the commercial banks are not able to tap. But

at the same time, it cannot be ignored that there should be adequate

protection for

the funds entrusted to them by depositors and for that purpose

it

is necessary that the working of these companies should be closely

monitored and supervised and adequate provisions

should be made for

enforcement of regulatory provisions that are made for the protections of the

interest

of the depositors. Since the Bank is required to discharge multi-

E farious functions, it would not

be in a position to devote

the· requisite amount

of attention in the matter of monitoring and supervising the functions of

these companies. The Union Government may, therefore, consider whether it

would be advisable to create a separate instrumentality which may be

entrusted with the task of supervision and enforcement of the provisions

F

G

regulating the functioning of these companies. The Union Government may ·

also consider whether the existing provisions need to be further strengthened

so

as to give greater protection to the interests of the depositors. We find that

in England the Banking Act, 1987 contains provisions for Desposit

protec­

tion Scheme for the Protection of the depositors. It may be considered

whether provisions on similar lines could be introduced here.

In the result, the appeal is allowed, the judgment

of the Calcutta High

Court dated May

3, 1995 in

C.O. No. 2!038(W) of 1993 is set aside and the

said writ petition filed

by the respondents is dismissed. But, in the

circum­

stances, there is no order as to costs.

K.K.T. Appeal Allowed

'

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