State Enactments Like Kerala/Gujarat Money Lenders Act Have No Application To NBFCs Registered Under RBI Act: Supreme Court

The Supreme Court has held that the state enactments such as Kerala Money Lenders Act, 1958 and Gujarat Money Lenders Act, 2011 will have no application to Non­ Banking Financial Companies (NBFC) regulated by the Reserve Bank of India (RBI).

The bench comprising Justices Hemant Gupta and V. Ramasubramanian observed that the Chapter III­B of the RBI Act is a complete code in itself and the power of intervention available for the RBI over NBFCs, is 'from the cradle to the grave'.

"It may be true that many times RBI may not be controlling the rate of interest charged by NBFCs on the loans advanced by them. It does not mean that they have no power to step in", the court added.

Background

Challenging the move of Government of Kerala insisting upon NBFCs to take a license under the Kerala Act, NBFCs filed a batch of writ petitions before the High Court of Kerala seeking a declaration that NBFCs registered under the RBI Act will not come within the purview of the Kerala Act. 

In Gujarat, the Bombay Money Lenders Act, 1946, which was applicable in the State of Gujarat, was invoked by the Registrar in the office of the Prevention of Money Lenders, against NBFCs operating in the State. The High Court of Gujarat (Division Bench), disagreed with the Kerala HC view and  allowed the special civil applications holding that Gujarat Act 14 of 2011 is ultra vires the Constitution for legislative incompetence, to the extent that it seeks to have control over NBFCs registered under the RBI Act. The State Government was restrained from applying the provisions of the Gujarat Act against NBFCs registered under the RBI Act.

Issue 

Before the Apex Court, the issue raised by NBFCs (challenging Kerala HC judgment) and State of Gujarat (challenging Gujarat HC Judgment) was whether NBFCs regulated by the Reserve Bank of India, in terms of the provisions of Chapter III­B of the Reserve Bank of India Act, 1934 could also be regulated by State enactments such as Kerala Money Lenders Act, 1958 and Gujarat Money Lenders Act, 2011?

Chapter III­B is a complete code in itself

Referring to the scheme of Chapter III­B of the RBI Act, the bench observed thus:

The above scheme of Chapter III­B of the RBI Act shows that the power of intervention available for the RBI over NBFCs, is from the cradle to the grave. In other words, no NBFC can carry on business without being registered under the Act and a NBFC which takes birth with the registration under the Act is liable to be wound up at the instance of the RBI. The entire life of a NBFC from the womb to the tomb is also regulated and monitored by RBI.

Chapter III­B of the RBI Act provides a supervisory role for the RBI to oversee the functioning of NBFCs, from the time of their birth (by way of registration) till the time of their commercial death (by way of winding up), all activities of NBFCs automatically come under the scanner of RBI. As a consequence, the single aspect of taking care of the interest of the borrowers which is sought to be achieved by the State enactments gets subsumed in the provisions of Chapter III­B.

RBI can control the rate of interest charged by NBFCs

The court also disagreed with the contention raised by the State of Kerala that the Reserve Bank of India does not control the rate of interest charged by NBFCs on the loans advanced by them and that, therefore, a State enactment which seeks to control this aspect, namely, the rate of interest cannot be said to be repugnant.

"NBFCs which play a very vital role in contributing to the financial health of the country and whose operations are controlled by RBI with the avowed object of operating the currency and credit system of the country to its advantage, have as their life line, the income received by way of interest on the loans advanced. Therefore, to say that RBI has no say in such a matter of vital interest, will strike at the very root of the statutory control vested in RBI. ...It may be true that many times RBI may not be controlling the rate of interest charged by NBFCs on the loans advanced by them. It does not mean that they have no power to step in. The power to determine policy and issue directions, available under Section 45­ JA can always be invoked by RBI."

..The fact that RBI generally leaves it to the market forces to determine the rate of interest, without any direct intervention, is not something that could be taken advantage of by the State of Kerala to step in and prescribe the maximum rate of interest chargeable by NBFCs on the loans advanced by them.

The court observed that even assuming that the Kerala Act was valid in its application to NBFCs when it was made, on the ground that the business of money lending is traceable to Entry 30 of List II, it has to give way for the parliamentary enactment. 

"The moment the Parliament stepped in to codify the law relating to registration and regulation of NBFCs, by inserting certain provisions in Chapter III­B of the RBI Act, the same would cast a shadow on the applicability (even assuming it is applicable) of the provisions of the Kerala Act to NBFCs registered under the RBI Act and regulated by RBI."

...Once it is admitted that the RBI Act is traceable to an entry in List­I, Article 246(1) comes into play. In any case, there are also areas of conflict. The Kerala Act, for instance, empowers the debtor under Section 8(1) to deposit the money due to money lender, into a Civil Court. Section 8(2) empowers the Civil Court to pass orders recording full or part satisfaction of the loan"

Case details

Nedumpilli Finance Company Limited vs State of Kerala | 2022 LiveLaw (SC) 464 | CA 5233 0F 2012 | 10 May 2022

Coram: Justices Hemant Gupta and V. Ramasubramanian

Headnotes

Reserve Bank of India Act, 1934 ; Chapter III B - Kerala Money Lenders Act, 1958- Gujarat Money Lenders Act, 2011 -  The Kerala Act and the Gujarat Act will have no application to NBFCs registered under the RBI Act and regulated by RBI - Though the provisions of the Tamil Nadu Pawn Brokers Act and the Tamil Nadu Money Lenders Act not examined, the principles of law laid down herein, would apply equally to these State enactments also (Para 11.2))

Reserve Bank of India Act, 1934 ; Chapter III B-  Chapter III­B of the RBI Act provides a supervisory role for the RBI to oversee the functioning of NBFCs, from the time of their birth (by way of registration) till the time of their commercial death (by way of winding up), all activities of NBFCs automatically come under the scanner of RBI. (Para 6.19,7)

Constitution of India, 1950 ; Article 246 - Reserve Bank of India Act, 1934 ; Chapter III B - Kerala Money Lenders Act, 1958- The moment the Parliament stepped in to codify the law relating to registration and regulation of NBFCs, by inserting certain provisions in Chapter III­B of the RBI Act, the same would cast a shadow on the applicability (even assuming it is applicable) of the provisions of the Kerala Act to NBFCs registered under the RBI Act and regulated by RBI - In cases of this nature, Article 246(1) would squarely apply. (Para 8,8.3)

Constitution of India, 1950 ; Article 246,254 - Three important tests of inconsistency or repugnancy - (i) whether there is direct conflict between the two provisions; (ii) whether Parliament intended to lay down an exhaustive Code in respect of the subject matter replacing the Act of the State legislature; and (iii) whether the law made by Parliament and the law made by State legislature occupy the same field. [Referred to Deep Chand vs. State of U.P  AIR 1959 SC 648 ] (Para 7.9)

Constitution of India, 1950 ; Article 254 - Repugnancy under Article 254 would arise only if both the Parliamentary law and the State law are referable to List­ III. [Referred to Innoventive Industries Limited vs. ICICI Bank and Anr (2018) 1 SCC 407 ]

Reserve Bank of India Act, 1934 ; Section 45JA(1) - The words "relating to" appearing in Section 45­JA(1) can be taken to restrict the power of RBI to give directions, only in relation to the matters mentioned after the words "relating to" - The items mentioned after the words "relating to" can only be taken to be illustrative and not exhaustive. (Para 7.5-7.77)

Reserve Bank of India Act, 1934 ; Section 45L(1)(b) - Power upon the RBI to give directions to NBFCs "relating to the conduct of business by them" - To say that RBI has no power in respect of such an important aspect such as the rate of interest chargeable on the loans, may not be correct. (Para 7.8)

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