Jeewan Holding Private Limited & Anr. v. Union of India & Anr.

(i) ceases to carry on the business of a nonbanking financial institution in India; or

(ii) has failed to comply with any condition subject to which the certificate of registration had been issued to it; or

(iii) at any time fails to fulfil any of the conditions referred to in clauses (a) to (g) of subsection (4); or

(iv) fails–

(a) to comply with any direction issued by the Bank under the provisions of this chapter; or (b) to maintain accounts in accordance with the requirements of any law or any direction or order issued by the Bank under the provisions of this Chapter; or

(c) to submit or offer for inspection its books of account and other relevant documents when so demanded by an inspecting authority of the Bank; or

(v) has been prohibited from accepting deposit by an order made by the Bank under the provisions of this Chapter and such order has been in force for a period of not less than three months: Provided that before cancelling a certificate of registration on the ground that the non-banking financial company has failed to comply with the provisions of clause (ii) or has failed to fulfil any of the conditions referred to in clause (iii) the Bank, unless it is of the opinion that the delay in cancelling the certificate of registration shall be prejudicial to public interest or the interest of the depositors or the non-banking financial company, shall give an opportunity to such company on such terms as the Bank may specify for taking necessary steps to comply with such provision or fulfillment of such condition; Provided further that before making any order of cancellation of certificate of registration, such company shall be given a reasonable opportunity of being heard. (7) A company aggrieved by the order of rejection of application for registration or cancellation of certificate of registration may prefer an appeal, within a period of thirty days from the date on which such order of rejection or cancellation is communicated to it, to the Central Government and the decision of the Central Government where an appeal has been preferred to it, or of the Bank where no appeal has been preferred, shall be final: Provided that before making any order of rejection of appeal, such company shall be given a reasonable opportunity of being heard. Explanation. – For the purposes of this section,– (I) “net owned fund” means– (a) the aggregate of the paid-up equity capital and free reserves as disclosed in the latest balance-sheet of the company after deducting therefrom–

(i) accumulated balance of loss;

(ii) deferred revenue expenditure; and

(iii) other intangible assets; and

(i) its subsidiaries;

(ii) companies in the same group;

(iii) all other non-banking financial companies; and

(2) the book value of debentures, bonds, outstanding loans and advances (including hirepurchase and lease finance) made to, and deposits with, –

(i) subsidiaries of such company; and

(ii) companies in the same group, to the extent such amount exceeds ten per cent of (a) above. (II) “subsidiaries” and “companies in the same group” shall have the same meanings assigned to them in the Companies Act, 1956.”

21. Reading of the provisions of Sub-Section (6) of Section 45- IA of the RBI Act, leaves no doubt that Sub-Section (6)(ii) enables the bank to cancel the CoR granted to a NBFC if it fails to comply with any condition subject to which the CoR had been issued to it. The Proviso clearly applies where the CoR has been cancelled on account of failure to comply with the provisions of Clause (ii) or on failure to fulfill any of the conditions in Clause (iii). In the present case the Petitioner failed to achieve the minimum prescribed limit of NOF within the period stipulated in the Notification and thus failed to comply with the directions issued by the Bank under provisions of Chapter III B of RBI Act. The conclusion, in my view, that is inevitable, after carefully perusing the Provisions, Notification and the Show cause notice, is that the CoR was cancelled by taking recourse to section 45 IA(6)(iv) and not under 45 IA(6)(ii), as sought to be contended by the Petitioners. The Proviso would not be attracted in the present case and therefore it cannot be held that the Petitioner was entitled to condonation of delay in achieving the NOF and curing the default. The clock in such matters cannot be put back.

22. Counsel for Respondent No.2 is right in his submission that in taxation and financial Legislations the requirement of meeting the fixed criteria is absolute. Any leeway in this regard shall cause prejudice to the Government in collection of revenues and make it difficult for the RBI to maintain stability in the financial and commercial markets. It needs no emphasis that any latitude shown by the Court in this regard will cause serious destruction in the financial and borrowing markets. The Court cannot overlook the avowed and solemn objective of enactment of these provisions and Amendment to the RBI Act viz. to regulate and curb the unhealthy practices of the NBFCs so that genuine depositors do not fall prey to the temptation of high interest and in the bargain lose their savings by investments in Companies who seek deposits only with an intent to defraud.

23. It is a settled law that when a Statute prescribes a procedure which is required to be followed then the said procedure has to be followed only in the manner laid down and in no other manner. In this context I may allude to the judgments of the Supreme Court in A.R.Antulay vs. Ramdas Sriniwas Nayak And Another, (1984) 2 SCC 500 and Bar Council of India vs. High Court of Kerala,(2004) 6 SCC 311.

24. It is equally settled that in matters of policy decisions and economic tests, the scope of judicial review is extremely limited. Unless the decision is shown to be contrary to the Statutory provisions or the Constitution of India, Courts should not interfere with the economic decisions of the State. As held by the Supreme Court in Villianur Iyarkkai Padukappu Maiyam vs. Union of India, (2009) 7 SCC 561 the Court cannot examine the relative merits of different economic policies and strike it down on the ground that another policy would have been better. The contention of the Petitioner that since the Petitioner achieved the NOF, though belatedly, direction should be issued to Respondent No.2 to condone the act and restore the CoR, will amount to the Court amending the Statute and the Notification in question and framing a new policy regime, which is a path on which the Court cannot tread.

25. I may now refer to a judgment of the Division Bench of the Madras High Court in The Regional Director, Reserve Bank of India and Ors. vs. Nahar Finance & Leasing Limited and Ors. (supra) where a similar issue had arisen before the Court. In the said case the CoR granted to the Respondents therein was cancelled on the ground that the required NOF had not been achieved in terms of Section 45-IA of the RBI Act. A writ petition was filed before the learned Single Judge to quash the Order as well as to extend the time to comply with the requirements of achieving the NOF. The Single Bench issued a direction to the RBI to extend the time limit in favour of the Writ Petitioners and the order was carried in appeal by the RBI. Examining the Notification and the provisions of the RBI Act, the Division Bench held as under:-

37. In the preceding paragraphs, we have held that subSection (3) of Section 45-IA can have no application to the facts of the present case. If such is the position, the statute nowhere provides for extension of time. In such scenario, the Writ Court could not have granted time till 31.03.2019. …”

26. A similar plea was rejected by a Co-ordinate Bench of this Court in M&M Finsec Private Limited (supra) and by a Bench of the Calcutta High Court in Namaste Management (supra). Relevant para of the Calcutta High Court in Namaste Management (supra) is as follows:- “Hearing the learned senior counsel for the appellant and the learned senior counsel for the Reserve Bank of India, we have noticed that the salient features of facts, as noted above, are not disputed. The fact of the matter remains that the appellant had a subsisting registration as NBFC in terms of Chapter 3B of the Reserve Bank of India Act till the cancellation of such registration. Whether or not the eligibility to continue to operate as an NBFC ceased with the nonadherence to the condition of Rs.[2] crores as NOF may be an issue for consideration. The question whether Reserve Bank of India or any other appellate authority including the Central Government would come to the aid of the appellant by condoning the delay in attaining the benchmark of Rs.[2] crores NOF is also a matter to be left to the domain of the Reserve Bank of India and the further administrative controls, if any, among the higher-ups in that regard. This is all the more so because bereft of public law being available, it will not be possible for the Writ Court to consider the issue of cancellation of the licence of the NBFC in the above-noted fact situation. It will also not be open to the High Court in Writ Jurisdiction to adjudicate on the sufficiency or otherwise of the case of prayer for condonation of delay and accepting any modality of permitting the appellant to operate as an NBFC in terms of Chapter 3B of the Reserve Bank of India Act. We are in agreement on this issue with the judgement of the Division Bench of the Madras High Court dated 22.04.2019 rendered in W.A.No.940 of 2019 [The Regional Director, Reserve Bank of India & Ors. vs. M/s. Nahar Finance & Leasing Limited].”

27. Learned counsel for the Petitioners had also argued that the time can be extended by virtue of sub-Section (3) of Section 45- IA of the RBI Act. The said provision, as is evident, begins with a non-obstante clause stating that notwithstanding anything contained in Sub-Section (1) an NBFC in existence on the commencement of the RBI (Amendment) Act, 1997 and having NOF of less than Rs.25 Lakhs may for enabling such Company to fulfill the requirement of NOF, continue to carry on the business of NBFC for three years from such commencement or for such further period as the Bank may allow. The same argument came up for consideration before the Division Bench of the Madras High Court in Regional Director (supra) and the Court interpreting the said provision held that the provisions of sub-Section (3) cannot be made applicable to the case where the cancellation of CoR is under 45-IA(6)(iv) and that sub- Section (3) was a standalone provision inserted by Act 23 of 1999 with effect from 09.01.1997 to deal with a particular situation which was prevailing at the relevant time.

28. In so far as the contention of the Petitioner that no personal hearing was given before cancelling the CoR is concerned, suffice would it be to note that the statutory framework does not mandate an opportunity of personal hearing. The second proviso to Sub-Section (6) of Section 45-IA provides that before cancelling the CoR a reasonable opportunity of being heard shall be given to the company. In several judgments it has been held that principles of natural justice are not a straight-jacket formula and their application will depend upon the relevant statute and the facts and circumstances of the case. Even this question was considered by the Madras High Court in The Regional Director, Reserve Bank of India (supra) and after examining the provision of 45-IA it was held that the Statute does not connote that an opportunity of hearing meant personal hearing. The Court also observed that a Show Cause Notice was given to the Writ Petitioners therein to which they had filed a reply and the grant of personal hearing would have made no difference as all they would have pleaded was their failure to comply under the Notification and given a justification. It would have been merely an empty formality to provide an opportunity of personal hearing. Relevant para is as follows:- “35.Be that as it may, the respondents/writ petitioners did not seek for any opportunity of personal hearing and have not stated as to how they were prejudiced in not being heard in person when admittedly in the reply to the show cause notice, they have candidly admitted that they have not fulfilled the NOF requirement before the cut of date April 1, 2017. Thus, in our considered view, no useful purpose would have been served, if the respondents/writ petitioners had been granted an opportunity of personal hearing, as nothing more could not have been pleaded by them having accepted their failure to comply with the requirements under the notification dated 27.03.2015. Therefore, the appellants were justified in stating that it would be an empty formality to provide an opportunity of personal hearing. If it had been a case where technical issues were involved on account of Court orders or any other circumstances or vis majeur or force majeur conditions prevailed, then probably, such persons would be in a position to explain better the factual matrix in a personal hearing. The cases before us cannot be placed in the said pedestal, since the respondents/writ petitioners have admitted non-compliance. The respondents should bear in mind that they are engaged in the business of financing. Therefore, it would be not acceptable for such a finance company to plead that they are unable to achieve the NOF. It may be a different matter, if the line of business was something other than financing. Thus, the very right of the respondents/writ petitions to operate is based on a licence issued under Section 45-IA of the Act. The licence comes with conditions. In terms of Section 45- IA of the RBI Act, it is the duty of the respondents to furnish the statements, information or particulars called for and to comply with any direction given to it under the provisions of Chapter III-B of the RBI Act. Therefore, there is no escape from the statutory requirement. The respondents can claim no vested right to carry on business without complying with the condition of licence or the directions issued by RBI.”

29. In the present case the Show Cause Notice was served on the company on 02.05.2018, to which a reply was filed. The principal ground raised in the reply was that Petitioners were unable to sell the agricultural land and therefore could not achieve the NOF within the timelines mandated under the Notification. In my view, a personal hearing would not have made any difference to the case of the Petitioners and as held by the Madras High Court would only have been an empty formality. I may also notice at this stage that the Notification was issued on 27.03.2015 and nearly a period of two years was granted to the Company to achieve the NOF. Therefore enough time was granted to achieve the NOF and the action of Respondent No.2 cannot be termed as unfair or unreasonable or violative of the principles of natural justice.”

6. The submission of learned counsel for the petitioners is that the respondent/ RBI has incorrectly applied the provision contained in Section 45-IA(1), Section 45-IA(3) and Section 45-IA(6) of the Reserve Bank of India Act, since insufficient time – contrary to the statute, was granted to increase the Net Owned Fund (NOF), and the petitioner was also denied the opportunity of being heard in terms of Section 45-IA(3)(ii) and Section 45- IA(6) of the said Act.

7. The submission of the petitioners is that the RBI notification dated 27.03.2015 – published on 11.03.2016, is not in accord with Section 45- IA(3) of the RBI Act. The time prescribed in the RBI Act to enhance/ achieve the NOF, according to the petitioners, is six years (3+3 years), but the time given to the petitioners to achieve the NOF of Rs.200 Lakhs was only two years and four days. The petitioners raised a grievance that the RBI notification enhancing the NOF was gazetted in the Official Gazette only on 11.03.2016, i.e. after a delay of 11 months and 14 days from the date of its issuance on 27.03.2015.

8. Having heard learned counsels, and perused the impugned judgment, in our view, the only issue that needs examination in the present appeal, is the interpretation of Section 45-IA of the RBI Act, which has been quoted in the extracted portion from the impugned judgment hereinabove.

9. At the outset, we may note that Section 45-IA was inserted in the Reserve Bank of India Act, 1934 vide Act 23 of 1997 on 09.01.1997.

10. Sub-Section (1) of Section 45-IA mandates that no non-banking financial company shall commence or carry on the business of a nonbanking financial company without, inter alia, having the net owned fund of twenty-five lakh rupees or such other amount, not exceeding two hundred lakh rupees, as the Bank may, by notification in the Official Gazette, specify. It is by resort to this provision [Section 45-IA(1)(b)] that the notification dated 27.03.2015 – Gazetted on 11.03.2016, was issued by the RBI raising the requirement of NOF to rupees two hundred lakh, to commence or carry on the business of a non-banking financial company. However, with a view to provide time to the existing non-banking financial companies to achieve the enhanced threshold of NOF of rupees two hundred lakh, the said notification provided time in the following manner: “Provided that a non-banking financial company holding a certificate of registration issued by the Reserve Bank of India and havng net owned fund of less than two hundred lakhs of rupees, may continue to carry on the business of non-banking financial institution, if such company achieves net owned fund of, – i. one hundred lakhs of rupees before April 1, 2016; and ii. two hundred lakhs of rupees before April 1, 2017.”

11. Sub-Section (2) of Section 45-IA obliges every non-banking financial company to make an application for registration to the RBI in the specified form. Insofar as the existing non-banking financial companies were concerned, such an application for registration was required to be made within six months from the commencement of the RBI (Amendment) Act, 1997, which was 09.01.1997. Such non-banking financial companies were permitted to carry on their business until a Certificate of Registration is issued, or rejection of application for registration is communicated to it.

12. Sub-Section (3) of the said Section provides that “Notwithstanding anything contained in sub-section(1)”, a non-banking financial company in existence on the commencement of the Reserve Bank of India (Amendment) Act, 1997, and having a net owned fund of less than twenty five lakh rupees may, for the purpose of enabling such company to fulfill the requirement of net owned fund, continue to carry on its business for a period of three years from such commencement, i.e. up to 09.01.2000; or such further period as the RBI may, after recording the reasons in writing for so doing, extend. This was subject to the condition that such company, within three months of fulfilling the requirement of the net owned fund, shall inform the Bank about such fulfillment. The further proviso reads that the period allowed to continue business under this Sub-Section shall, in no case, exceed six years in the aggregate.

13. A bare reading of Sub-Section (3) of Section 45-IA would show that the law provided time till 09.01.2000 to non-banking financial companies to achieve the NOF of Rs.25 Lakhs – the amount specified in Section 45- IA(1)(b). The Reserve Bank could further extend the period for attainment of NOF of Rs.25 Lakhs after recording reasons in writing, such that, “the period allowed to continue business under this subsection shall in no case exceed six years in the aggregate. ”. This only means that to attain NOF of Rs. 25 Lakhs, the RBI could grant an extension, at the most, for reasons to be recorded, up to 09.01.2003.

14. The submission of learned counsel for the petitioners is that the RBI could have, and should have, similarly granted a period of three years to the petitioners to attain the NOF of Rs.200 Lakhs from the time the notification dated 27.03.2015 was gazetted, which could further be extended by a period of three years, for reasons to be recorded.

15. We do not find any merit in this submission of the petitioner. It is clear on a reading of Sub-Section (3) of Section 45-IA, that the said Sub- Section deals only with the situation as it arose upon enactment of Act 23 of 1997, whereby Section 45-IA was introduced for the first time. Sub-Section (3) of Section 45-IA has, therefore, exhausted itself out and it cannot be invoked in respect of subsequent enhancement of NOF requirement in terms of the Section 45-IA(1)(b). The notification in question was issued by the RBI after 18 years of the enactment of Act 23 of 1997, (whereby Section 45- IA was inserted in the RBI Act). By then, Sub-Section (3) had already worked itself out. The petitioners have not brought to our notice any provision in the Act which stipulates the minimum time period that the RBI was obliged to grant to non-banking financial companies to achieve the enhanced NOF. In the absence of any statutorily prescribed period, the RBI could grant any reasonable time for attainment of the NFO of Rs. 200 lakhs.

16. As noticed above, the RBI adopted a graded plan for achievement of NOF of Rs.200 Lakhs by 01.04.2017, by stipulating that such companies should attain NOF of Rs.100 Lakhs before 01.04.2016; and, Rs.200 Lakhs before 01.04.2017. Even if the submission of learned counsel for the petitioners that this notification dated 27.03.2015 became effective only upon it being gazetted on 11.03.2016 were to be accepted, the fact remains that the petitioners had nearly a near to attain the NOF of Rs.200 Lakhs. Unfortunately, the petitioners, admittedly, did not attain the NOF of Rs.200 Lakhs on or before 01.04.2017, and even according to the petitioner, they had attained the said NOF only on 28.03.2018, i.e. a year after the deadline.

17. The respondent/ RBI was, therefore, empowered to cancel the Certificate of Registration of the petitioners under Sub-Section (6) of Section 45-IA.

18. The grievance of the petitioners that the petitioners were not granted a reasonable opportunity of being heard before the petitioners were visited with the cancellation order, is also meritless. The respondent issued a showcause notice to the petitioners calling upon the petitioners to show-cause as to why its registration should not be cancelled, since it had not achieved the NOF of Rs.200 Lakhs by 01.04.2017. This show-cause notice was issued on 02.05.2018. This show-cause notice was replied to by the petitioners, and only after consideration thereof, the petitioners were visited with the impugned order of cancellation of the petitioners’ registration as a nonbanking financial company by the RBI.

19. A reading of Section 45-IA(6) prescribes that “before making any order of cancellation of certificate of registration, such company shall be given a reasonable opportunity of being heard.”. This reasonable opportunity of being heard need not necessarily be by way of an oral hearing. Since the petitioners were given a show-cause notice, and were called upon to respond to it – which they did, in our view, the petitioner stood afforded the reasonable opportunity of being heard, as contemplated under Section 45-IA(6) of the RBI Act.

20. Moreover, the petitioners have also availed of the appellate remedy before the Central Government and, there again, after considering the petitioners’ appeal, the same has been dismissed.

21. For the aforesaid reasons, we do not find any error in the impugned judgment calling for our interference. The appeal is, accordingly, dismissed.

VIPIN SANGHI, J. JASMEET SINGH, J. SEPTEMBER 01, 2021 B.S. Rohella