Sajjan Bank (Private) Ltd. V.

Reserve Bank of
India AIR 1961 Mad. 8
• Brief Facts: The Sajjan Bank (Pvt) Ltd. which is carrying on business,
originated from Sajjan and Co. Ltd., which was incorporated in Nov
1944 with the main object of carrying on money-lending business.
• In 1946 the company was converted into a banking company and in
that year its name changed into the present name.
• All its shares are held by its three directors who are said to be
closely related.
• The banking companies Act, 1949, referred to hereafter as the Act,
came into force on 16.3.1949.
• S.22 of the Act provided amongst other things that every banking
company in existence at the commencement of this Act should
before the expiry of 6 months from such commencement and,
• every other company before commencing banking business in India,
apply in writing to the RBI for a license under the section to carry on
banking business.
• The Section further provided that the Banking Companies in
existence at the commencement of the Act could continue to carry
on their banking business till final orders were passed on their
application for license.
• On 14.9.49, the petitioner bank applied u/S.22 of the Act, to the
respondent for a license to carry on banking business.
• The officers of the RBI inspected the bank and report was prepared.
• The inspection appears to have revealed the existence of certain
defects in the working of the bank.
• The RBI therefore decided to keep in abeyance the consideration of
the question of issuing a license evidently with a view to watch the
progress of the bank in eradicating the defects pointed out by the
inspection report.
• The defects noticed were the subject matter of subsequent
correspondence between the petitioner and the RBI.
• A fresh inspection of the petitioner Bank was carried out in 1956
u/S.35 of the Act, which also revealed certain facts.
• The RBI was evidently not satisfied that the affairs of the Bank were
being conducted in the interests of the depositors.
• The petitioner was directed to show cause against the refusal of the
license.
• The bank was also furnished with a copy of the inspection report.
• After considering the representation of the petitioner, the
respondent declined to grant the license to the petitioner to carry
on banking business in the terms of 1st proviso to S.22(2) of the Act.
• Aggrieved by that, the petitioner has moved this Court for the issue
of a writ of certiorari to quash the order of the RBI refusing to grant
a license to carry on business as a banking company.
• Issues: 1. S.22 of the Act was unconstitutional in so far as it
proceeded to restrict the fundamental right of the petitioner to
carry on its banking business.
• 2. Even if the provisions of S.22 of the Act be held to be in
accordance with the Constitution, the action of the respondent was
arbitrary,
• 3. In any event the procedure adopted by the respondent was illegal
and in that after an inspection u/S.35, it could only proceed to act
u/S.35(4) and not to refuse the license altogether.
• The RBI came into existence on 1.4.1935, it is a central bank
combining it its functions the regulation of both the credit and the
currency of the country.
• Prior to its formation the responsibility for the currency was vested
in the Central Government.
• The Imperial Bank of India performed the banking functions.
• This dichotomy between the currency and credit was found to be a
weakness in the Indian monetary system by the Royal Commission
of Indian Currency and Finance in 1926.
• The commission recommended the establishment of a Central Bank
by charter on certain lines which experience had proved to be
sound.
• It is said the structure of the Bank was modelled very largely on the
Bank of England.
• It is a non-political statutory body, the general superintendence and
management of the bank’s affairs being vested in the Central Board
of Directors.
• For each of the four regional areas, Bombay, Calcutta, Madras and
New Delhi, there is a local Board functioning.
• The function of the local Boards is to advise the Central Board may
validly delegate to them.
• The preamble to the RBI Act states that the bank was constituted to
regulate the issue of bank notes, to keep up reserves with a view to
secure monetary stability in India and generally to operate currency
and credit system of the country to its advantage.
• The main function of the RBI is to regulate the monetary system of
the country so as to ensure the maintenance of economic stability
and assist in its growth.
• The Bank has got the sole right to issue currency notes and it also
acts as the Banker to the Government.
• It also acts as a banker to the various commercial Banks and other
financial institutions and it has got various rights and duties
prescribed in Chapter II of the RBI.
• For the performance of its duties in regard to the regulation of the
credit of the country, the RBI is invested with powers of the control
of the bank rate, open market transactions etc.,
• The RBI’s responsibilities include the development of an adequate
and sound banking system not only for trade and commerce but
also for the agricultural industry.
• The RBI is, therefore, occupying a position of considerable
importance in the economic development of the country and its
monetary system.
• Originally, joint stock banks were governed in respect of their
incorporation, organization and management by the Indian
Companies Act, 1913, which was common to banking as well as non-
banking companies.
• In 1936, new provisions were introduced to that Act in regard to the
banking companies.
• In 1949, the Banking Companies Act was passed to consolidate and
amend the law relating to the Banking Companies.
• The necessity for the legislation was for safeguarding the interests
of the depositors, shareholders and of the economic interests of the
country in particular.
• S.5(b) the term “banking” defined as “accepting, for the purpose of
lending or investment, of deposits of money from the public,
repayable on demand or otherwise, and withdrawable by cheque,
draft, order or otherwise”.
• An ordinary moneylender who does not accept moneys on terms
enabling a depositor to draw cheques upon him would not be a
bank or banker properly so called.
• The provisions of the Act would apply only to the limited class of
cases where the bank or banker allows the withdrawal of money by
the issue of cheques.
• A banking company has been defined to be a company that
transacts the business of banking in India.
• S.6 provides that in addition to banking business banking company
may engage themselves in various allied businesses which are more
or less incidental to or essential for the carrying on of the banking
business.
• S.13 prescribes the minimum standards as paid up capital and
aggregate reserves.
• Ss 12 and 12(a) prevent the control of companies by a few persons
to the detriment of a majority of shareholders and permits the RBI
to require a banking company to call for a general meeting of the
shareholders of the company, to elect fresh directors in accordance
with the voting rights.
• S.14 prohibits the creation of charges on unpaid capital.
• Ss 17 and 18 provide for minimum reserve funds and cash reserve.
• S.20 prohibits loans on security of the company’s shares and
unsecured loans to its directors to firms or private companies in
which they are interested.
• S.21 gives power to the RBI to control its advances.
• S.22 prescribes a system of licensing of banks, the power of licensing
being vested in the RBI.
• S.23 places restrictions on the opening of new places of business or
change of existing place of business.
• Ss 24 and 25 require the maintenance of sufficient liquid assets.
• S.26 obliges a bank to report to the RBI every year about unclaimed
deposits.
• Ss 27 and 28 invest a power in the RBI to call for information and to
punish them if it so decides.
• Ss 35 and 36 confer power in the RBI to call for periodical returns
and inspection of books of accounts and empower the Central
Government to take action against banks conducting business in a
manner detrimental to the interests of depositors.
• S.35-A gives powers to the RBI to give directions to the banking
companies in general, or to any banking company in particular, in
the national interest or to prevent affairs of any banking company
being conducted in a manner detrimental to the interests of the
depositors or in a manner prejudicial to the interests of the banking
company or to secure proper management thereof.
• There are also other provisions relating to the management,
restriction on the holding of shares and in regard to the winding up
of banking companies.
• Thus the legislation is a comprehensive measure, covering the
establishment, the working and the liquidation of the banks.
• The RBI is substantially invested with the power of regulation of the
banking companies.
• In this country there are various types of banks ranging from the
village money lender to a big commercial bank.
• It was found necessary in the interests of the public that there
should be a regulation of the banking system.
• S.22 introduces a complete system of licensing of banks by the RBI.
• The grant of a license in the case of banks incorporated in India is
dependent upon the maintenance of a satisfactory financial
condition.
• In the case of foreign banks there is a further condition imposed
that the country of their origin could not discriminate in any way
against the banks registered in India Sub-sections (1) and (2) provide
for the necessity of obtaining a license by a banking company and
the time at which the license is to be applied.
• The proviso to sub-section (2) authorizes an existing banking
company to continue to function until it is granted a license or
refuse a license.
• The conditions for granting the license by the RBI are set out in sub-
section (3).
• The section also provides for the cancellation by the RBI of a license
granted by it, in that case the concerned bank is given a right of
appeal.
• The Counsel for the appellant contends that the provisions of
S.22(1) are unconstitutional of trade or business as in effect an
arbitrary power is vested in the RBI to grant or refuse a license,
which according to him is really a permit for the doing of the
business to be granted by the body.
• In Namazi v. Dy. Custodian of Evacuee Property, Madras [AIR 1951
Mad 930]
• It was held that while a permit system would be unconstitutional in
so far as it related to the exercise of fundamental rights, it was well
settled that a system of licensing, which had for its object the
regulation of trade, would not be repugnant to Art.19(1)(g) of the
constitution.
• That decision is also valuable for ascertaining whether in a
particular case what was intended was only a license for the
regulation of trade or a permit as a condition precedent to the
exercise of a business by an arbitrary power in the authority to
grant or refuse a license.
• The existence of rules for the guidance of the authority, the
insistence of reasons for the refusal of a license, provision for a right
of appeal, the nature of the enquiry before the refusal of a license
being judicial in an enquiry were held to constitute that what was
prescribed by a statute was only a regulation of trade by the issue of
license and not the insistence of a permit.
• The question then is whether the provisions of S.22(1) of the
Banking Companies Act which require a license for carrying on
business by a banking company should be held a system of enabling
the doing of such a business by the issue of permits or whether only
a license intended to regulate the business of banking.
• Even the foreign banking experts were not averse to the proposal.
• The licensing itself is vested in a statutory authority, which is itself a
Central Banking institution concerned both with the currency and
credit operations in the country.
• The RBI was established with a view to fostering the banking
business and for impeding the growth of such business.
• The powers vested in it u/S.22 are not one invested with a mere
officer of the Bank.
• The standards for the exercise of the power have been laid down in
S.22 itself.
• The RBI is a non-political body concerned with the finances of the
country.
• When a power is given to such a body under a statute which
prescribes the regulations of a Banking Company, it can be assumed
that such power would be exercised so that genuine banking
concerns could be allowed to function as a bank, while institutions
masquerading as banks or those run on unsound lines or which
would affect the interests of the public could be weeded out.
• The power given is regulated by the statute and being entrusted to a
statutory body which is itself regulating the credit of the country the
nature of the power, its exercise after the investigation prescribed
by the statute invests it with a quasi-judicial character.
• Such a power cannot be said to be an arbitrary one.
• It is a mere license granted as a matter of course to all genuine
banking institutions run on sound lines as the judicial character of
power would indicate.
• It cannot be held to be a permit.
• It must also be noticed that the refusal of the license u/S.22 does
not mean a stoppage of business.
• The essence of banking is the opening of current account and the
enabling of the constituents to drawn by cheques.
• Refusal of a license would entail a loss of that type of business and
it would be perfectly open to the petitioner to carry on business as
moneylenders the only disability or restriction being that it cannot
have transactions under which the constituents could draw cheques
on him.
• The next question was whether the RBI in this case arbitrarily
exercised the power, as is complained by the petitioner.
• There is no complaint in this case that sufficient opportunity was
not given, but what is contended is that further opportunities
should have been given to rectify the errors rather than refuse the
license.
• This Bank being one that came into existence before the Act, it
could continue its banking business till the license was granted or
refused.
• It was necessary that some kind of control should be exercised over
the bank pending decision on the issue of the license.
• The 1st inspection revealed defects in the method of keeping
accounts and contravention of certain provisions of the Act.
• After the 2nd inspection u/S.35 a report was duly submitted to the
local board of the Bank, who were satisfied that the proposal to
refuse the license was proper in the circumstances.
• Even after the due instructions the bank was not able to effectuate
any material improvement in the pattern of its working.
• It was not able to attract sufficient deposits from the public.
• As a private limited company to start with it was converted into a
banking company evidently to circumvent the provisions of the
Madras Pawn Brokers Act, 1943.
• The paid up capital was only Rs.50,000.
• Its reserves were found to be poor and the establishment charges
had absorbed more than 50% of the gross income.
• The RBI gave more than one opportunity to the petitioner to show
cause against the refusal of license.
• In the report placed before the Central Committee we find a
comparative statement of the undesirable features noticed in the
inspection reports with the corresponding representation of the
bank and the comment of the bank.
• It was only after a careful consideration of all the matters that the
RBI came to the conclusion that the continuance of the bank would
be likely to prove detrimental to the interests of prospective
depositors and that the petitioner was not entitled to a license.
• The respondent did not take any hasty action.
• The progress and working of the bank was closely watched for more
than 4 years and every opportunity was given to the Bank to justify
its claim as a sound banking concern.
• Conclusion: The learned Advocate General explained that the delay
in the disposal of the application by the respondent was due to their
anxiety not to precipitate a crisis which a quick decision to refuse
license might occasion and which might further lead to undesirable
results.
• Far from the action of the RBI being arbitrary, it has given the
utmost consideration to the petitioner’s case.
• I am of the opinion that the action of the RBI in refusing to grant the
license to the petitioner is within its jurisdiction, and such
jurisdiction has been properly exercised in the case.
• This petition is dismissed with costs.
 SECURITISATION AND
RECONSTRUCTION OF
FINANCIAL ASSETS AND
ENFORCEMENT OF SECURITY
INTEREST ACT, 2002
• S.2(b) “asset reconstruction” means acquisition by any [asset
reconstruction company] of any right or interest of any bank or financial
institution in any financial assistance for the purpose of such financial
assistance.
• S.2(ba). “asset reconstruction company” means a company registered
with RBI u/S.3 for the purpose of carrying on the business of asset
reconstruction or securitization or both.
• S.2(u) “qualified buyer” means a financial institution, insurance company,
bank, state financial corporation, state industrial development
corporation, trustee or asset reconstruction company which has been
granted a certificate of registration u/S.3(4) or any asset management
company making investment on behalf of mutual fund or foreign
institutional investor registered under the SEBI Act, 1992 or regulations
made thereunder, any category of non-institutional investors as may be
specified by the RBI u/S.7(1) or any other body corporate as may be
specified by the Board.
• S.2(z) “securitization” means any acquisition of financial assets by
any asset reconstruction company from any originator, whether by
raising of funds by such asset reconstruction company from
qualified buyer by issue of security receipts representing undivided
interest in such financial assets or otherwise.
• S.2(zb) “security agreement” means an agreement, instrument or
any other document or arrangement under which security interest is
created in favor of the secured creditor including the creation of
mortgage by deposit of title deeds with the secured creditor.
• S.14 CMM or DM to assist secured creditor in taking possession of
secured asset.
 Vishal N.Kalsaria v. Bank of India
(2016) 3 SCC 762
• Brief Facts:
• Respondents 4 and 5 approached Bank of India (R-1) for a financial
loan, which was granted against mortgaged by deposit of title deeds
of several properties belonging to them, including the property in
which the appellant was allegedly a tenant.
• R-4 and 5 failed to pay the dues within the stipulated time and thus,
in terms of the Securitization and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002 (The SARFEASI Act),
the asset became a non-performing asset.
• The Bank served a notice on R-4 and 5 u/S.13(2) of the Act.
• The respondents failed to clear the dues within the stipulated
period of 60 days.
• The Bank filed an application before the CMM concerned u/S.14 of
the Act, seeking possession of the mortgaged which were in actual
possession of the appellant.
• The CMM allowed the said application and directed the Assistant
Registrar concerned to take possession of the secured assets.
• R-4 served a notice on the appellant, asking him to vacate the
premises in which he was residing within 12 days from the receipt of
the notice.
• The appellant fearing eviction, filed a rent suit before the Small
Cause Court under the Maharashtra Rent Control Act, 1999.
• The said court passed an ad interim order of injunction in favor of
the appellant, restraining R-4 from obstructing the possession of the
appellant over the suit premises during the pendency of the suit.
• On the basis of that Order, the appellant then filed an application as
an intervenor seeking stay against the execution of the order passed
by the CMM.
• The CMM dismissed the said application by placing reliance on
Harshad Govardhan Sondagar, (2014) 6 SCC 1.
• Issue: Whether the SARFEASI Act prevails over the Tenancy Act to
evict the tenant from the disputed premises in order to execute the
order of attachment of properties of Non Performing Assets.
• Observations:
• In Harshad case the SC held that the alleged tenant must produce
proof of execution of a registered instrument in his favor by the
lessor, and where by delivery of possession,
• the CMM or the DM, as the case might be, would have come to the
conclusion that the alleged tenant was not entitled to the
possession of the secured asset for more than an year from the date
of the instrument or from the date of delivery of possession in his
favor by the landlord.
• The CMM observed that as the appellant did not place on record
any registered instrument to fulcrum his contention, he was not
entitled to any protection under the law in view of the ratio laid
down in Harshad case.
• It was further observed that when the secured creditor took action
u/S.13 or S.14 the Act to recover the possession of the secured
interest and recover the loan amount by selling the same in public
auction, then it was not open for the Small Cause Court to grant an
injunction u/S.33 of the Rent Control Act.
• It was held that the order passed by the Small Cause Court could not
be said to be binding upon the Bank, in the light of the fact that it
was not a party to the proceedings.
• The Rent Control Act was enacted by the State Legislature u/Sch VII
List II Entry 18.
• The SARFEASI Act was enacted by parliament u/List I to regulate the
debtor by securing the possession of such secured assets and
recover the loan amount due to the banks and financial institutions.
• The said Act was enacted to provide procedures to the banks to
recover their security interest from the debtors and their collateral
security assets as provided under the provisions of that Act.
• It is meant to operate as a tool for banks and ensures a smooth debt
recovery process.
• A perusal of the statements of objects and reasons of Rent Control
Act and the SARFEASI Act indicates that the two Acts are meant to
operate in completely different spheres.
• The SARFEASI Act providing a smooth and efficient recovery
procedure to enable the banks to recover the NPAs is a laudable
object for the development of the economy of the country.
• On the other hand the Rent Control Acts to secure the rights of the
tenants who are the weaker sections of the society.
• The ultimate object behind the enactment of this legislation is to
control and regulate the rate of rent so that unnecessary hardship is
not caused to the tenants against arbitrary and unreasonable
evictions from the possession of the property.
• It is a settled position of law that once tenancy is created, a tenant
can be evicted only after following the due process of law, as
prescribed under the provisions of the Rent Control Act.
• A tenant cannot be arbitrarily evicted by using the provisions of the
SARFEASI Act as that would amount to stultifying the statutory
rights of protection given to the tenant.
• A non obstante clause (S.35) cannot be used to bulldoze the
statutory rights vested in the tenants under the Rent Control Act.
• The expression “any other law for the time being in force” as
appearing in S.35 cannot mean to extend to each and every law
enacted by the Central and State Legislatures.
• It can only operating in the same field.
• There is an interest of the Bank in recovering the non-performing
asset on the one hand, and protecting the rights of the blameless
tenant on the other.
• The Rent Control Act being a social welfare legislation, must be
construed as such.
• A landlord cannot be permitted to do indirectly what he has been
barred from doing under the Rent Control Act.
• The provisions of the SARFEASI Act cannot be used to override the
provisions of the Rent Control Act.
• Any acceptance of the contentions raised by the Bank in this regard
would render the entire scheme of all the Rent Control Acts
operating in the country as useless and nugatory.
• Tenants would be left wholly to the mercy of their landlords and in
the fear that the landlord may use the tenanted premises as a
security interest while taking loan from a bank and subsequently
default on it.
• In case of default of the loan, the maximum brunt will be borne by
the unsuspecting tenant, who would be evicted from the possession
of the tenanted property by the bank.
• Under no circumstances this can be permitted.
• It is sad to see the manner in which the decision in Harshad case has
been misinterpreted to create the present confusion.
• Random sentences have been picked up from the judgment and
used, without any attempt to understand the true purport of the
judgment in its entirety.
• The said decision cannot be understood to have held that the
SARFEASI Act override the Rent Control Acts that the banks are at
liberty to evict the tenants residing in the tenanted premises which
have been offered as collateral securities for loans on which default
has been done by the debtor/landlord.
• The SC in a catena of cases, the legislative powers of the State are
denuded which would amount to subverting the law enacted by the
State legislature.
• Such a situation was not contemplated by Parliament while enacting
the SARFEASI Act and therefore, the interpretation sought to be
made on behalf of the Banks cannot be accepted as the same is
wholly untenable in law.
• The said interpretation would not only tantamount to violation of
the rule of law, but also statute enacted by the state u/A. 246(2) as
useless and nugatory.
• Further, while S.106 of the TPA, 1882 does provide for registration
of leases which are created on a year to year basis, one must
remember the effect of non-registration, or the creation of tenancy
by way of an oral agreement.
• According to S.106, a monthly tenancy shall be deemed to be a
tenancy from month to month and must be registered if it is
reduced into writing.
• However, the TPA remains silent on the position of law in cases
where the agreement is not reduced into writing.
• If the parties are executing their rights and liabilities in the nature of
a landlord-tenant relationship and if regular rent is being paid and
accepted, then the mere factum of non-registration of deed will not
make the lease itself nugatory.
• If no written lease deed exists, then such tenants are required to
prove that they have been in occupation of the premises as tenants
by producing such evidence in the proceedings u/S.14 of the
SARFEASI Act before the Magistrate concerned.
• In terms of S.55(2) of the Maharashtra Rent Control Act, the onus to
get such a deed registered is on the landlord.
• In the light of the same, neither can the landlord nor the banks be
permitted to exploit the fact of non-registration of the tenancy deed
against the tenant.
• Conclusion: As far as granting leasehold rights being created after
the property has been mortgaged to the bank, the consent of the
creditor needs to taken.
• This view has already been taken by the SC in Harshad Case.
• But nothing has been stated to the effect that the tenancy created
after mortgaging the property must necessarily be registered under
the provisions of the Registration Act and the Stamp Act.
• Consequently, the impugned judgments and orders passed by the
HC/CMM are set aside and the appeals are allowed.
• The amounts which are in deposit pursuant to the conditional
interim order of the SC towards rent either before the
CMM/Magistrate Court or with the banks concerned, shall be
adjusted by the banks concerned towards the debt due from the
debtors/landlords in respect of the appellants in these appeals.
• The enhanced rent by way of conditional interim order shall be
continued to be paid to the respective banks, which amount shall
also be adjusted towards debts of the debtors/landlords.
Keshavlal Khemchand & Sons(p) Ltd v. Union of
India (2015)4SCC 770
SARFEASi Act, 2002
2. Definitions.- (1) In this Act, unless the context
otherwise requires-
(o) ‘non-performing asset’ means an asset or
account of a borrower, which has been classified by a
bank or financial institution as substandard, doubtful
or under guidelines relating to assets classifications
issued by the RBI.
SARFEASI (Amendment) Act, 2004
2. Definitions.- (1) In this Act, unless the context
otherwise requires-
(o) ‘non-performing asset’ means an asset or
account of a borrower, which has been classified by a
bank or financial institution as substandard, doubtful
or loss asset-
(a) in case such bank or financial institution is
administered or regulated by any other authority or
body established, constituted or appointed by any
law for the time being in force, in accordance with
the directions or guidelines relating to assets
classifications issued by such authority or body;
(b) in any other case, in accordance with the
directions or guidelines relating to assets
• Under the amended definition, the classification of a borrower by
the creditor is required to be made in accordance with the
directions or guidelines issued by an “authority or body either
established or constituted or appointed by any law for the time
being in force”, in all those cases where the creditor is either
administered or regulated by such an authority (hereinafter referred
to as “the Regulator”).
• If the creditor is not administered or regulated by any such
Regulator then the creditor is required to classify the account of a
borrower as NPA in accordance with the guidelines and directions
issued by the RBI.
• In other words, by the amendment, Parliament made it possible
that different sets of guidelines made by different bodies may be
followed by different creditors depending upon the fact as to who is
the administering or regulating authority of such creditor.
• Hence, the challenge to the amended provision.
• Issue: whether the delegation of power in order to classifying the
assets by the authority or body is constitutionally tenable or not?
• Whether authorizing different regulators to prescribe different
norms for identification of an NPA with reference to different
creditors, does amount to unreasonable classification u/Ss 21 and
35 of the BR Act.
• Observations: Unlike international banks, the banks and financial
institutions in India do not have power to take possession of
securities and sell them.
• Our existing legal framework relating to commercial transactions
has not kept pace with the changing commercial practices and
financial sector reforms.
• This has resulted in slow pace of recovery of defaulting loans and
mounting levels of NPAs of banks and financial institutions.
• The enactment was preceded by three Committee Reports- two
headed by Mr. M.Narasimham and the third by Mr. T.R.
Andhyarjuna.
• Huge amounts of money are lent by various banks and other
financial institutions, and the speedy recovery is not happening.
• In order to facilitate the creditors to recover speedily the Parliament
made a law called the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993 under which the Tribunal constituted.
• After a decade of working of the tribunals, Parliament felt that even
the machinery and procedure established is not able to produce the
desired results of efficiently recovering monies from the borrowers.
• Then the parliament made the SARFEASI Act, the crux of the Act is
that any “security interest” created in favor of a “creditor”, who by
definition under the Act becomes a “secured creditor”, can be
enforced without the intervention either of the court or tribunal by
following the procedure prescribed u/S.13 of the Act.
• Another important aspect of the Act is that the activity of the
securitization companies (SCs) and reconstructions companies (RCs)
are given a statutory recognition, their activity is regulated u/Ss 3
and 4.
• u/S.3 such companies are required to be registered with RBI, such
registration is liable for cancellation u/S.4 on the happening of any
one of the events specified therein.
• S.5 confers statutory authority upon SCs and RCs to acquire
“financial assets” of any creditor.
• S.5(2) further provides that upon such acquisition of an asset, the SC
or RC, as the case may be, steps into the shoes of the original
secured creditor from whom the asset is required.
• The constitutional validity of the Act was examined by this Court is
Mardia Chemicals Ltd (2004) 4 SCC 311 and it was upheld the
constitutionality of the Act except that of S.17(2) which was
declared ultra vires Art 14.
• The Madras HC rejected the submission of the petitioners that the
impugned provision suffers from the vires of excessive delegation.
• It was held that RBI issuing master circulars annually which contain
the consolidated instructions from time to time in regard to income
recognition, asset classification, provisioning and other related
matters were held to be valid and sufficient.
• The HC took note of the fact that RBI in exercise of the statutory
authority u/S.21 and 35-A of the BR Act, prescribes norms for the
various aspects of banking specified under the Act.
• On the other hand the Gujarat HC opined that the amended
definition of “NPA” creates two classes of borrowers,.
• One class are governed by the guidelines issued by the RBI, and the
other are governed by the guidelines issued by different authorities.
• The HC opined that the deviation from the original objects and
reasons would be violative of Art 14 of the Constitution of India.
• The arguments from the borrowers counsel is that the Act does not
provide a reasonable opportunity to demonstrate that the
classification of the borrower’s account as an NPA is untenable, the
power to make such a classification itself becomes arbitrary and
violative of Art.14.
• In reply by the UOI, that in recognition of the fact that the
assessment of an account of borrower as NPA depends upon
innumerable factors which constantly keep changing.
• Parliament thought fit to stipulate that the assessment be made in
the light of the guidelines made by either RBI or various other
Regulators regulating the activities of various creditors.
• There is no delegation of any essential legislative functions.
• The prescription that the classification of NPA is to be made on the
basis of the guidelines framed by different bodies regulating the
different creditors is a constitutionally permissible classification.
• We would like to make it clear that we are not undertaking the
examination of a second round of attack on the constitutionality of
the Act in its entirety.
• The expression “asset” is not defined under the Act, but the
expressions “financial asset” and “non-performing asset” are
defined u/Ss 2(1)(l) and 2(1)(o) of the Act.
• The claim of a creditor to any debt or receivables, etc. from the
borrower becomes the financial asset of the creditor.
• We think it is necessary to trace out the history of the concepts of
NPA, and loan transactions for the better appreciation of the
controversy before us.
• In 1991, the GOI appointed a 9 member committee headed by Mr.
M.Narasimham to examine various aspects relating to the structure,
organization, functions and procedures of the banking system.
• It took note of the capital adequacy standards prescribed by the
Committee known as Basle Committee and opined that it is necessary
that the Indian banks also conform to those standards.
• But as a prelude to the compliance with the Banks of International
settlements (BIS) standards, and it opined that the banks should have
their assets revalued on a more realistic basis and on the basis of their
realizable value.
• It is of the view that for the purposes of provisioning, banks and Fis
should classify their assets by compressing the Health Codes into the
following broad groups:
1. Standard– Current and existing.
2. Substandard----NPAs not exceeding two years.
3. Doubtful assets---NPAs exceeding two years also include loans
instalments.
4. Loss--- where loss has been identified but the amounts have not been
written-off.
• RBI issues “Master Circulars” w.r.t., various classes of banks and FIs.
• RBI issued instructions dealing with the NBFCs and also the
securitization companies and reconstruction companies.
• Originally such guidelines were meant only to enable the creditors
to have a rational view of their “assets/financial assets” for the
better administration of their funds and the banking business.
• What exactly is a loan transaction.
• Definition of loan: A contract of loan of money is a contract whereby
one person lends or agrees to lend a sum of money to another, in
consideration of a promise express or implied to repay that sum on
demand, or at a fixed or determinable future time, or conditionally
upon an event which is bound to happen, with or without interest.
• Term Loans:- In a case repayment is due at the end of the specified
period and, in the absence of any express provision or implication to
the contrary, no further demand for repayment is necessary.
• The cause of action for the creditor to initiate legal proceedings for
the recovery of the entire amount due and outstanding from the
borrower.
• Normally such term loans are also accompanied by some “security
interest” in a “secured asset” of the borrower.
• Such a recovery is to be made normally by instituting a suit for
recovery of the amounts by enforcing the “security interest”
through a DRT this can be achieved.
• The question- why did parliament impose such an additional
obligation on the creditors while proposing to create a mechanism
for the expeditious recovery of the money due to the secured
creditors – requires examination.
• The answer appears to be that under the scheme of S.13(4) the
“secured asset” could be taken possession of and could either be
sold or the management could be taken over etc.
• Such an action if not taken after an appropriate deliberation in a
given case could result in the disruption of industrial production and
consequently resulting in unemployment and loss of GDP etc.
impacting larger interests of the nation.
• Therefore, Parliament must have thought that the secured creditors
are required to assess whether the default in repayment by the
borrower is due to any factor which is a temporary phenomenon
and the same could be managed by the borrower if some
accommodation is given.
• In our view, such a classification is relevant and assumes importance
in the decision-making process of the secured creditor u/S.13(2) as
which one of the steps contemplated u/S.13(4) should be resorted
to in the case of a given defaulting borrower.
• Borrower’s business should be taken into consideration.
• Realising the same, parliament left it to RBI and other Regulators to
prescribe guidelines from time to time in this regard.
• RBI is the expert body to which the responsibility of monitoring the
economic system of the country is entrusted under various
enactments like the RBI Act, the BR Act.
• Various others like SBI, NHB, which are though bodies created under
different laws of parliament enjoying a large amount of autonomy,
are still subject to the overall control of the RBI.
• Regulation of the monetary system and banking business is one of
the fundamental responsibilities of any modern state and essential
for the economic and political stability of the state.
• In regard to the delegation of powers in catena of cases the SC held
that “essential legislative function” need to be addressed.
• Whether defining every expression used in an enactment is an essential
legislative function or not?
• Many judgments examined above proposition and recognized that there
is a need for some amount of delegated legislation in the modern world.
• If the parent enactment enunciates the legislative policy with sufficient
clarity, delegation of the power to make subordinate legislation to carry
out the purpose of the parent enactment is permissible.
• The policy of the legislature is sufficiently clear to guide the delegate
depends upon the scheme and the provisions of the parent Act.
• In our opinion, the function of prescribing the norms for classifying a
borrower’s account as an NPA is not an essential legislative function.
• The submission that the amendment of the definition of the expression
NPA u/S.2(1)(o) is bad on account of excessive delegation of essential
legislative function, in our view, is untenable and is required to be
rejected.
• The submission that by authorizing different Regulators to prescribe
different norms for the identification of an NPA with reference to
different creditors amounts to unreasonable classification is also
required to be rejected for the reason that all the creditors do not
form a uniform/homogeneous class.
• For eg., the Exim Bank loans are generally in foreign currencies.
• Similarly, loans granted by housing finance creditors which are in
turn regulated by National Housing Bank are loans which are term
loans for relatively longer periods that other loans.
• There is nothing uniform about these creditors or their activities.
• The amendment also covered the entities like Asian Development
Bank, which did not fall within the purview of any Regulator in
India.
• Therefore, the amendment was made in the Act to take care of
these situations and these amendments were necessary to cover
the deficiencies noticed in the Act.
• Therefore, to say that enabling them to follow different norms would be
violative of Art.14, in our view, would be wholly untenable.
• In regard to the 3rd submission of the borrower, we would not like to deal
in the instant batch of cases as there are a few cases where factually the
secured assets have been transferred by the original creditors.
• Those cases been detagged from this to be heard separately.
• In regard to the 4th submission of the borrower, it must fail on the basis of
express language of S.13(3-A) which obliges the secured creditor to
examine the representation/objection, if any,
• Made by the borrower on receipt of notice contemplated u/S.13(2) and
communicate the reasons to the borrower if such a representation is not
accepted by the secured creditor.
• The representation/objection contemplated u/S.13(3-A) is required to be
examined objectively.
• Conclusion: S.13 obligates the secured creditor to communicate the
reasons for non-acceptance of the representation or objections to
the borrower.
• All the writ petitions and appeals are disposed of declaring that the
amended definition of the expression “NPA” u/S.2(1)(o) of the Act is
constitutionally valid.
• In the result, all the writ petition either filed before the Madras and
Gujarat HCs and the appeals of the borrowers stand dismissed.
• The appeals of the creditors are allowed.
• Each of the writ petitioners/borrowers shall pay costs to the
respective creditors calculated at 1% of the amount outstanding on
the date of the notice u/S.13(2) of the Act in each of the cases.