Delhi High Court Directs RBI's Appellate Authority To Reconsider Revocation Of Registration Certificate Of Shubh Lakshmi Capital

The Delhi High Court has recently directed the Appellate Authority of the Reserve Bank of India to reconsider the revocation of registration certificate of Shubh Lakshmi Capital Limited- a Non Banking Financial Company, on grounds of shortfall in its its Net Owned Fund (NOF). The Court has also asked the Authority to give the petitioner similar treatment that was meted out to other NBFCs who had suffered similar cancellation and whose cancellation was directed to be reviewed by the Appellate Authority or recalled by the RBI itself.

A Division Bench of Justice Vipin Sanghi and Justice Rekha Palli issued the direction while hearing a plea filed against the order Reserve Bank of India's order cancelling the petitioner's registration as a Non-Banking Financial Institution (NBFI).

Facts

The petitioner, Shubh Lakshmi Capital Limited was registered as a Non-Banking Financial Institution (NBFI) and its certificate of registration had been cancelled on the ground that it had failed to achieve the Net Owned Fund (NOF) of Rs. 200 Lakhs (Rs. 2 Crores) before 01.04.2017, thereby not fulfilling the conditions referred to in Clauses (a-g) of sub-section 4 of Section 45–IA of the Reserve Bank of India Act, 1934.

The petitioner had then filed an appeal against the order before the Appellate Authority contending that it had, in any event, met the NOF requirement of Rs. 200 Lakhs as on 31.03.2018. However, his appeal was rejected by the Appellate Authority through an order dated 18th November 2019.

Submissions of the Parties

The petitioner in the present case had submitted before the Court that before issuing the cancellation order, the RBI had sent a Show-Cause Notice requiring the petitioner to show cause as to why action be not initiated against the petitioner for not meeting the NOF requirement of Rs. 200 Lakhs as on 31st March 2017. The petitioner responded to the notice and had informed RBI that the Company had informed RBI the total sum is about 2 crores and it will be difficult to include the profit and loss account for the calculation of net wealth every year as that will fluctuate every year. The petitioner had requested RBI to drop the above notice issued against the company and to not remove company's name from its records and cancel its Registration Certificate as the company's Net wealth was above 2 crores.

However, according to the petitioners, RBI did not accept the explanation offered by the and proceeded to cancel the registration by the impugned order.

The petitioner had contended before the Appellate Authority that though it had achieved the required NOF as on 1st April 2016, it could not achieve the same as on 31st March 2017, but only due to its Auditor's irregularities. It also placed the position of its NOF as on 31.03.2018 as certified by its Chartered Accountant before the Appellate Authority to show that it clearly met the NOF requirement of Rs. 200 Lakhs on the said date. The Appellate Authority did not consider these aspects and its order suffers from non application of mind to the petitioner's submissions, with an inconsistent as the petitioner's appeal has been rejected without assigning any reason whatsoever.

The petitioner contended that in an another similar plea, where the company failed to achieve its NOF requirement as on 31.03.2017 but had subsequently achieved on 14.06.2017, on account of its Managing Director having been taken ill, the explanation was accepted by the Appellant Authority and RBI was directed to review its order of cancellation the certificate of registration. (M/s Countwell Management Services Private Limited v. RBI.)

In order to prove the RBI's and the Appellate Authority's inconsistency in dealing with similar case, the petitioner Counsel cited another case of M/S Juhie (India) Private Limited v/s Reserve Bank of India and Anr, where a similar order of cancellation passed by the RBI under Section 45-IA of the RBI Act was challenged. During the pendency of the case, the RBI had itself reconsidered the matter and decided that it was not necessary to cancel the Certificate of Registration issued to the petitioner. He contended that neither the RBI nor the Appellate Authority has been acting consistently in the matter of cancellation of registration of certificate under Section 45-IA of the RBI Act.

The Reserve Bank of India on the other hand contended that the requirement of meeting the NOF benchmarked of Rs. 100 Lakhs by the cut-off date of 31st March 2016 & of Rs. 200 Lakhs by the cut off 31st March 2017 are sacrosanct and the period for meeting the requirement cannot be extended.

Court's Observations

The Delhi High Court observed that in the present case, the petitioner's stand that it met the NOF requirements as on 31st March 2017, was not accepted by the RBI. Before the Appellant Authority the petitioner sought to explain that it was on the advice of its Auditor that it was under a bonafide impression that it met the requirement of maintaining a NOF of Rs. 200 Lakhs as on 31st March and that in any case, it met the said requirement as on 31st March 2018.

The High Court held that the Appellate Authority should have considered the submissions of the petitioner with due application of mind that whether the stand of the petitioner's original Auditor - on the basis of which the petitioner believed that it met the NOF requirement of Rs. 200 Lakhs, was correct or not. Even if it found that the petitioner's stand was not correct, it should have considered whether the petitioner was deserving of such a drastic action of cancelling its Certificate of Registration for a minor shortfall - which was in any event made up as on 31st March 2018.

The Court noted that the petitioner is also entitled to expect similar treatment at the hands of the Authorities, including the Appellate Authority, as was meted out to other NBFCs who had suffered similar cancellation of their Certificate of Registration as NBFCs, and whose cancellation was directed to be reviewed by the Appellate Authority or recalled by the RBI itself.

The Court, therefore set aside the order passed by the Appellate Authority dated 18th November 2019 and remanded the matter back to the Appellate Authority to reconsider the matter in the light of the High Court's observations. The parties have been directed appear before the Appellate Authority on 22nd Feb 2021 for fixing a date for hearing.

Advocates KC Mittal, Yugansh Mittal and Amit P Sahi appeared for petitioner.

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