TMI Blog1992 (1) TMI 337X X X X Extracts X X X X X X X X Extracts X X X X ..... schemes conducted by it were covered by the provisions of the Banning Act which had come into force w.e.f. December 12, 1978. On September 3, 1979 the Peerless filed a writ petition in the Calcutta High Court for a declaration that the Prize Chits Banning Act did not apply to the business carried on by the Peerless. A similar writ petition was filed questioning a notice issued by the Madhya Pradesh Government on the same lines as that issued by the West Bengal Government. A learned Single Judge of the High Court dismissed both the writ petitions but appeals preferred by the Peerless under the Letters Patent were allowed by a Division Bench of the Calcutta High Court. It was declared that the business carried on by the Peerless did not come within the mischief of the Prize Chits Banning Act. Against the judgment of the Division Bench of the Calcutta High Court, the Reserve Bank of India, the Union of India and the State of West Bengal preferred appeals before this court. The question considered in the above case was ``Is the endowment scheme of the Peerless Company a Prize Chit within the meaning of Section 2(e) of the Prize Chits and Money Circulation Schemes (Banning) Act?'' Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r cent if deposits were made during the Christmas-Pongal season. Several of them offered gifts and prizes. If the Reserve Bank of India considers the Peerless Company with eight hundred crores invested in government securities, fixed deposits with National Banks etc. unsafe for depositors, one wonders what they have to say about the mushroom non-banking campanies which are accepting deposits, promising most unlikely return and what action is proposed to be taken to protect the investors. It does not require much imagination to realise the adventurous and precarious character of these business. Urgent action appears to be called for to protect the public. While on the one hand these schemes encourage two vices affecting public economy, 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 whatsover. Action appears imperative.'' Khalid, J., another learned Judge aggreeing with the judgment of Chinnappa Reddy, J., further added his short but important concluding paragraph as under : ``I share my brother's concern about the mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reserve Bank of India. (c) The impugned directions providing that they represent irreducible minimum for safeguarding the interest of and for preventing exploitation of small and unwary depositors cannot be implemented without suitable modification. It is not reasonably practicable to comply strictly with the directions as they stand by the writ petitioners and the similarly situated companies. The Supreme Court in Peerless case (Supra).....reserved the liberty to the Reserve Bank of India to take such steps as are open to them in law to regulate the schemes such as those granted by the Peerless to prevent exploitation of subscribers and to protect thousands of employees. The impugned directions without modifications will run counter to the aforesaid directions of the Supreme Court. (d) The business of savings and investments carried on by the company and similarly situated companies having not been declared unlawful or banned, power of the Reserve Bank of India to regulate such business cannot be permitted to be prohibitory resulting in the ultimate closure of the business carried on by the writ petitioner company and other similarly situated companies. If the modifications as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the administrative and management expenses and expenditure on commission and publicity. In the impugned directions no restriction has been imposed on the expenditure by a residuary non-banking company on any of these heads. In our view, the impugned directions without modifications, instead of suppressing the mischief, will only lead to adverse unworkable and/or impracticable results inasmuch as if the residuary non-banking companies cannot comply with such directions in toto, such companies have to go out of existence. This cannot be the object of the impugned directions. If the liability in terms of the contractual obligations is provided not only in the accounts but also by suitable investment in terms of Clause 6 of the directions, in our view, all the residuary non-banking companies, irrespective of their net worth, will be able to carry on the business. (f) Every residuary non-banking company shall disclose its Books of Accounts and balance sheet the aggregate amount of liability accrued and payable to the depositors in accordance with the terms of the contract. (g) The directions contained in clause 6 for deposit or investment and the liability shall be read subjec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd order dated 23rd March, 1990. It prayed that suitable provision should be made for a depositor who wants back the money before maturity. If the depositor intends to get refund of the money invested before the expiry of actual contract period, he should be required to keep the funds for a minimum period in accordance with the contract. Before maturity he can only take loan but not the principle amount with interest. The amounts of returns should also be less than 5 per cent to provide for the collection and other expenses of the non-banking companies. The Division Bench of the High Court took the view that the order dated 23rd March, 1990 required clarification as it was not made clear as to whether non-residuary banking companies are under an obligation to pay discontinued certificates before the stipulated period in the contract, if so what would be the rate of interest. The Division Bench by order dated December 24, 1990 clarified its earlier order dated 23rd March, 1990 as under : ``(a) If the contract by and between the company and the depositor provides that no payment on discontinued certificate will be made before the expiry of the term stipulated in the contract, in su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir marked 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 and 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 ten percent shall be in fixed deposits with any of the public sector banks. (b) not less than 70 percent shall be in unapproved securities; (c) not more than 20 percent 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. Explanation : "Net owned funds" shall mean the aggregate of the paid-up capital and free reserves as appearing in the latest audited balance sheet of the company as reduced by the amount of accumulated balance of loss, deferred revenue expenditure and other intangible assets, if any, as disclosed in the said balance sheet. (2) Every residuary non-banking com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vires of Section 45J and 45K of the Reseve Bank of India Act, 1934. None of the said sections authorises the Reserve Bank to frame any directions prescribing the manner of investment of deposits received or the method of accountancy to be followed or the manner in which its balance-sheet and books of accounts are to be drawn up. It has been contended that Section 45J has no manner of application in the present case. Section 45K (3) of the Act on which reliance has been placed on behalf of the Reserve Bank, merely provides that the Reserve Bank may, if it considers necessary in the public interest so to do, give directions to non-banking institutions either generally or to any non-banking institutions in particular, in respect of any matters relating to or connected with receipts of deposits, including the rate of interest payable on such deposits and the purpose for which deposits will be received. According so Sec. 45K (4) if any non-banking institution fails to comply with any direction given by the bank under sub-s. (3) the Reserve Bank may prohibit the acceptance of deposits by that non-banking institution. It is thus submitted that on a plain reading of Sec. 45K (3) the Reser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duct of business by financial institution or institutions. In order to exercise its powers under sec. 45L of the Act, it has to apply its mind for the purpose of arriving at the statutorily required satisfaction. In fact, such recital is necessary since such satisfaction is a pre-conditions for the Reserve Bank to exercise its powers under section 45L of the Act. On the other hand it has been contended on behalf of the Reserve Bank that the power of the Reserve Bank to regulate deposit acceptance activities of non-banking and financial institutions under Chapter IIIB of the Act cannot be disputed. The Reserve Bank has power to issue the impugned directions under Section 45J, 45K and 45L of the Act. The pith and substance of Para 6 of the directions of 1987 is to ensure that deposits received from the public are invested in a manner to secure the repayment of the deposits. A deposit is, by definition, a sum of money received with a corresponding obligation to repay the same. Thus, the repayment of the deposit is an integral part of the transaction of a receipt of deposit. It is contended that the expression "receipt of deposit" must be construed liberally, in the light of the nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unmistakably goes to show that the Reserve Bank if considers necessary in the public interest so to do can specify the conditions subject to which any prospectus or advertisement soliciting deposits of money from the public may be issued. It can also give directions to non-banking institutions 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 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 respect of any matters relating to or connected with the receipt of deposits (emphasis added). In our view a very wide power is given to the Reserve Bank of India to issue directions in respect of any matters relating to or connected with the receipt of deposits. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the depositors. It was not the concern of the Reserve Bank as to how and in what manner these companies would regulate their expenses or would be able to conduct such business for earning more profits. According to the Reserve Bank of India these companies cannot be allowed to spend a mighty of deposits for meeting their own expenses. They should find out their own resources for meeting the expenses. According to the Reserve Bank the rate of interest to be paid by these companies to the depositors has been fixed as 10 per cent per annum. They could easily invest such amount in bonds issued by public sector corporation and earn interest at the rate of 14 per cent per annum or more and thereby earn a profit of 4 per cent and regulate their expenses within the limits of such profits. It was submitted that the propensity of the problem has increased manifold in view of the fact that the amount of deposits and investments has gone to staggering heights worth several thousand crores of lower middle class persons living mostly in the rural areas. A bogey of employment hazards of several thousand regular employees and still a large number of agents working in the field cannot deter the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rve Bank that it is an admitted position that the business of RNBCs is to collect funds from the public and invest the same in Government securities and bank deposits. In the application forms and in the advertisement's issued by these companies it is expressly held out to the public that their moneys are safe with the banks and in Government securities. It is the very nature of their business which makes it non-viable if they are to give fair return to the depositors and private security for the repayment of their money. The scheme of control as provided in the directions of 1987 might be harsh but the same is in conformity with the assertions held out by these companies to the public at large. These directions subject the companies to proper discipline by monitoring their actions and such directions cannot be considered as unreasonable. The reasonableness of the directions when looked at from the point of view of the depositors for whose safeguard they have been issued, is beyond question. Return provided and the security to be given through proper investment cannot be faulted on any ground. Thus what seems to be an impossible situation for these companies is not due to the impug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deposits received to bridge the time gap between income and expenditure. Merely because the directions do not fix a ceiling on the rate of commissions it does not imply that the Reserve Bank has granted its permission to payment of high commission or incurring of large expenses on management etc. The RNBCs are free to incur such expenses and organize their business as they desire as long as the depositors are fully secured at all times. The contention that the business of the RNBCs will close down if the directions of 1987 are to be adhered to is not based on facts and misconceived in law. A perusal of Directors' Report of Peerless for the years 1988, 1989 and 1990 clearly go to show that they did not consider the company in any financial difficulty and in fact paid larger dividends even after complying with the impugned directions of 1987. It has thus been submitted that given a wide latitude in judging the validity of economic legislation on the touch stone of reasonableness, in the absence of patent arbitrariness but having nexus with the public objective sought to be attained, the durations cannot be condemned as being violative of Article 19(1) (g). The result of the content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the amount capitalised by him is considered, the actuarial basis cannot be adopted and this liability must always be stated at its full value. The principle of actuarial valuation is in opposite for the business of RNBCs. It has also been submitted that the formula laid down by the High Court about the quantum of investments to be made by RNBCs is incapable of effectively monitoring and hence the provisions made in the directions of 1987 regarding security to depositors would be rendered wholly illusory. Such impossibility in the monitoring has been demonstrated as follows: (A) These companies do not fix a definite but variable percentage of investment with respect to amounts collected by way of each instalment under the certificates of deposits; e.g. Peerless would invest 75 % of the collections made out of 1st instalment (retaining and taking to P L A/c, 25 %) and 82 % out of 2nd instalment and so on. At any given point of time, there will be thousands of deposit certificates with varying maturity and the amounts collected would be an impossibility to find out and verify whether the amounts invested are in accordance, with the proportion fixed by the companies with respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any other RNBC and neither Peerless nor its 14 lac field agents, 3 thousand field officers and 4 thousand direct employees should be made to suffer. The result of following directions of 1987 would be that all the above agents, officers and employees of the Peerless could loose their jobs and their family members will be thrown on the streets. The Peerless had abolished the provision of forfeiture in all its schemes as early as in 1986 that is even prior to coming into force of the directions of 1987. The Peerless has been compelled to challenge paragraphs 6 and 12 of the directions of 1987 since enforcement of these provisions would result in complete annihilation of the undertaking of Peerless in the near future. It was further contended that it is inherent in the business carried on by Peerless and other similar RNBCs that the working capital is generated out of the subscriptions received from the certificate holders. Such business comprises in collecting subscriptions from depositors either in lumpsum or in instalments and such deposits are paid back with the guaranteed accretions, bonus, interest etc. in terms of the contract at the end of the stipulated term. Through this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business. It changed over to the present form of business from 1956 and since then it has been carrying on such business with the full knowledge of R.B.I. as well as other concerned authorities. The R.B.I. never objected to the accounting system followed by the Peerless. In view of the abolition of the forfeiture clause the alleged risk to the depositors has become totally non- existent. It was further argued that the R.B.I. framed regulatory measures in 1973 such miscellaneous non-banking companies (Reserve Bank) Directions, 1973. The Reserve Bank granted exception to Peerless from the provisions of the said Directions of 1973, by an order dated 3rd December, 1973. The Favourite Small Investments Limited filed a writ petition challenging the refusal of Reserve Bank to grant exemption to them from the provisions of the said 1973 Directions to granting such exemption to Peerless. In the said writ petition the R.B.I. filed an affidavit justifying the denial of exemption to Favourite Small Investments Ltd. and in the aforesaid affidavit submitted in detail the accounting procedure of Peerless including the fact that Peerless was transferring a portion of the subscriptions to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... virtually thrown on the streets. The field officers and their families will face starvation and extreme penury in case the validity of such directions is upheld. Thus any restriction which would be prohibitive or which would result in closure of the undertaking of Peerless would be against public interest. We have heard the arguments of learned counsel for the parties. It may be made clear at the outset that questions raised in these cases regarding the validity of paragraphs 6 and 12 of the directions of 1987 cannot be determined merely by taking into consideration the working of the financial soundness of the one company alone like Peerles but the matter has to be examined in a broader perspective of all RNBCs. We have to keep in mind, while deciding the controversies raised in the arguments, such RNBCs which are doing the same kind of business of taking deposits and returning the same to the certificate holders after a gap of 7 to 10 years along with interest, bonus etc. In the affidavit submitted before this Court on behalf of Reserve Bank of India it has been stated that prior to 1987 directions, there were 747 such companies which were conducting this business under various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e agents on securing a fresh business and a disincentive to collect subscriptions of subsequent years. It is a matter of common experience and knowledge that most rural folk particularly those belonging to the lower strata of society will not pay their subscriptions regularly unless somebody takes the trouble of collecting their subscription with the same enthusiasm as may be shown in enrolling the subscribers in the beginning. It is no doubt correct that these companies do tap and collect the deposits from such areas where the agents of public sector banks or public sector companies or instrumentalities of the state are unable to reach. Thus these companies mop up a large amount of money for ultimately investing in the nationalised bank or other Govt. owned corporations or companies. However, the Reserve Bank considered the safety of the money of the depositors as the paramount consideration in issuing the direction of 1987. It cannot be disputed that the interest of the employees as well as the field officers and agents have also to be taken into consideration while deciding the reasonableness of the impugned directions. It may be further noted that in the Reserve Bank of India v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own and the regulatory measure was introduced to remedy the mischief. The conditions which can be prescribed to effectuate this purpose must a fortiori, to be valid, fairly and reasonably, relate to checkmate the abuse of juggling with the depositors/investors' hard earned money by the corporate sector and to confer upon them a measure of protection namely availability of liquid assets to meet the obligation of repayment of deposit which is implicit in acceptance of deposit. Can it be said that the conditions prescribed by the Deposit Rules are so irrelevant or have no reasonable nexus to the objects sought to be achieved as to be arbitrary? The answer is emphatically in the negative. Even at the cost of repetition, it can be stated with confidence that the rules which prescribed conditions subject to which deposits can be invited and accepted do operate to extend a measure of protection against the notorious abuses of economic power by the corporate sector to the detriment of depositors/investors, a segment of the society which can be appropriately described as weaker in relation to the mighty corporation. One need not go so far with Ralph Nadar in `America Incorporated' to establ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill thus be left without any income during the period of operation of such schemes and cannot meet its working capital requirements. It has been submitted that the directions of 1987 really amount to prohibition of the business in a commercial sense without reasonable basis and are thus violative of Art. 19(1) (g) of the Constitution. In support of the above contention reliance has been placed on Mohammad Yasin v. The Town Area Committee, Jalalabad and another, [1952] SCR 572; Premier Automobiles Ltd. and anothers v. Union of India, AIR 1972 SC 1690 and on Shree Meenakshi Mills Ltd. v. Union of India AIR 1974 SC 366. It has also been contended that it is now well settled by plethora of judicial pronouncements that the restrictions on any business caused by regulations should not be more than what would be necessary in the interest of the general public and such restrictions should not overreach the scope of the objects achieved by the regulations. The contention on behalf of the Reserve Bank is that the directions have been made in public interest of safeguarding the interest of millions of depositors and the Reserve Bank is not concerned and while doing so it was rightly thought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fixed deposits with public sector banks or unencumbered approved securities or in other investments, a sum which shall not, at the close of business on 31st December, 1987 and thereafter at the end of each half year i.e. 30th June and 31st December not less than the aggregate amounts of the liabilities to the depositors whether or not such amounts have become payable. Thus according to the above provision whole of the aggregate amounts of the liabilities to the depositors whether or not such amounts have become repayable, is required to be deposited or invested. 10 % of such amount is required to be deposited in public sector banks and 70 % in approved securities and 20 % has been allowed to be invested by the company according to its own choice. In order to understand the rigour of the directions laid down in paragraph ₹ 6', it would be necessary to understand the scope of other directions as well. Paragraph 4 of the directions lays down that the deposit shall not be accepted for a period of less than 12 months or more than 120 months i.e. one years from the date of receipt of such deposits. The normal standard applied to non financial and financial companies is that they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they should invest their own working capital and find such resources elsewhere with which the Reserve Bank has no concern. If we look at the Annual Report and Accounts of Peerles for the years 1988, 1989 and 1990 it is clear that it had conducted its business following the impugned directions of 1987 and still had earned substantial profits in these years. It is clear that Peerless is a company having established as back as in 1932 and had substantial funds to invest the entire amount of deposits and had met the expenses out of its accumulated profits of the past years. This shows that the business can be run and profit can be earned even after complying with the impugned directions of 1987 issued by the Reserve Bank. It is not the concern of this court to find out as to whether actuarial method of accounting or any other method would be feasible or possible to adopt by the companies while carrying out the conditions contained in paragraphs 6 and 12 of the directions of 1987. The companies are free to adopt any mode of accounting permissible under the law but it is certain that they will have to follow the entire terms and conditions contained in the impugned directions of 1987 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther. The Court does not supplant the "feel of expert" by its own views. When the legislature acts within the sphere of its authority and delegates power to an agent, it may empower the agent to make findings of fact which are conclusive provided such findings satisfy the test of reasonableness. In all such cases, judicial inquiry is confined to the question whether the findings of fact are reasonably on evidence and whether such findings are consistent with the laws of the land. In R.K. Garg v. Union of India others, etc. etc., [1981] 4 SCC 675 at p. 690 a Constitution Bench of this Court observed as under: "Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, J. that the legislature should be allowed some play in the joints, be-cause it has to deal with complex problems which do not admit of solution through any doctrinaire or strait-jacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. It has been vehemently contended before us on behalf of the Peerless employees and field agents that in case the impugned directions are not struck down, the Peerless will have to close down its business and several thousands of employees and their family and several lakhs of field agents would be thrown on the street and left with no employment. We do not find any force in the above contention. So far as Peerless is concerned there is no possibility of its closing down such business. It has already large accumulated funds collected by making profits in the past several years. Thus it has enough working capital in order to meet the expenses. We are not impressed with the argument of Mr. Somnath Chatterjee, Learned Senior Advocate for the Peerless that after some years the Peerless will have to close down its business if directions contained in paragraphs 6 and 12 are to be foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bserve the public interest. In the result I set aside the orders of the High Court and allow the appeals arising out SLP Nos. 6930-30 A of 1991, 7140 of 1991 and 3676 of 1991 filed by the Reserve Bank of India and dismiss the wirt petition No. 677 of 1991. No order as to costs. K.RAMASWAMY, J. While respectfully agreeing with my learned brother since the issues bear far reaching seminal importance, I propose to express my views as well. This Court in Reserve Bank of India etc. v. Peerless General Finance and Investment Co. Ltd. Ors. etc., [1987] 2 SCR 1 for short `first Peerless case' while holding that Prize Chits and Money Circulation Schemes (Banning) Act, 1978 does not attract "Recurring Deposits Schemes", pointed out that the schemes harshly operate against the poor sections of the society who require security and protection; urgent action appeared to be called for and was imperative to protect the public and emphasized to evolve fool proof scheme to prevent fraud being played upon persons not conversant with practices of the financial enterprises who pose themselves as benefactors of the people. In pursuance thereof the appellant, Reserve Bank of India, for short `RBI' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osits including the rates of interest payable on such deposits and the periods for which deposits may be received. The use of the adjective `any' matter relating to or connected with the receipt of deposits is wide and comprehensive to empower the RBI to issue directions in connection therewith or relating to the receipt of deposits. But exercise of power is hedged with and should be "in the public interest." Section 45L provides that if the RBI is satisfied that for the purpose of enabling it "to regulate the credit system of the country to its advantage it is necessary so to do"; it may give to such institutions either generally or to any such institution, in particular, "directions relating to the conduct of business" by them or by it as financial institution or institutions including furnishing of information of particulars "relating to paid up capital, reserves or other liabilities", the "investments" whether "in the Government securities" or "otherwise", the persons to whom, and the purposes and periods for which; finance is provided "the terms and conditions", including "the rates of interest", on which it is provided. Section 45Q provides that the provisions of this chapt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he explanation "Net Owned funds" shall mean the aggregate of the paid-up capital and free reserves as appearing in the latest audited balance sheet of the company as reduced by the amount of accumulated balance of loss, deferred revenue expenditure and other intangible assets, if any, as disclosed in the said balance sheet. Sub-paragraph (2) enjoins toe R.N.B.C to entrust to one of the public sector banks designated in that behalf. Deposits and securities referred to in clauses (a) and (b) of the proviso to sub-paragraph (1) to be held by such designated bank is for the benefit of the depositors. Such securities and deposits shall not be withdrawn by the R.N.B.C. or otherwise dealt with, except for repayment to the depositors. Sub-paragraph (3) obligates it to furnish to the R.B.I. within 30 days from the close of business on 31st December, 1987 and thereafter at the end of each half year i.e., as on 30th June and 31st December, a certificate from its auditors, being member of institute of Chartered Accountants, to the effect that the amounts deposited in fixed deposits and the investment made are not less than "the aggregate amounts of liabilities to the depositors" as on 30th Jun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing any deposit under any scheme or arrangement in lump-sum or in instalment by way of contribution or subscription by R.N.B.C. in effect the operation of the directions inhibit the existing business and prohibits the future companies to come into being. As seen the public purpose of the directions is to secure for the depositors, return of the amounts payable at maturity together with interest, bonus, premium or any other advantage accrued or payable to the depositors. To achieve that object every R.N.B.C. is enjoined to deposit and keep deposited in fixed deposit and invest and keep invested in unencumbered approved securities a sum which shall not, at the close of each half year, be less than the aggregate amount of the liability to the depositors whether or not such amount has become payable. The object, thereby, is to prohibit deployment of funds by R.N.B.C. in any other manner which would work detrimental to the interest of the depositors. The question emerges whether paragraph 6 and 12 are ultra vires of Articles 19(1)(g) and 14 of the Constitution. Article 19(1)(g) provides fundamental rights to all citizens to carry on any occupation, trade or business. Cl. 6 thereof empow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wer. The court has, therefore, always to guard against the gradual encroachments and strike down a restriction as soon as it reaches that magnitude of total annihilation of the right. However, there is presumption of constitutionality of every statute and its validity is not to be determined by artificial standards. The court has to examine with some strictness the substance of the legislation to find what actually and really the legislature has done. The court would not be over persuaded by the mere presence of the legislation. In adjudging the reasonableness of the law, the court will necessarily ask the question whether the measure or scheme is just, fair, reasonable and appropriate or is it unreasonable, unnecessary and arbitrary interferes with the exercise of the right guaranteed in Part III of the Constitution. Once it is established that the statute is prima facie unconstitutional, the state has to establish that the restrictions imposed are reasonable and the objective test which the court to employ is whether the restriction bears reasonable relation to the authorized purpose or an arbitrary encroachment under the garb of any of the exceptions envisaged in Part III. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot only as per the provisions of the Act but also the rules and directions or instructions issued by the RBI in exercise of the power thereunder. Chapter 3B expressly deals with regulations of deposit and finance received by the R.N.B.Cs. The directions, therefore, are statutory regulations. In State of U.P. v. Babu Ram, [1961] 2 SCR 679, this Court held that rules made under a statute must be treated, for all purposes of construction or obligations, exactly as if they were in that Act and are to the same effect as if they contained in the Act and are to be judicially noticed for all purposes of construction or obligations. The statutory rules cannot be described or equated with administrative directions. In D.V.K. Prasada Rao v. Govt. of A.P., AIR 1984 AP 75, the same view was laid. Therefore, the directions are incorporated and become part of the Act itself. They must be governed by the same principles as the statute itself. The statutory presumption that the legislature inserted every part thereof for a purpose to and the legislative intention should be given effect to, would be applicable to the impugned directions. The R.B.I. issued the directions to regulate the operations of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y's comforts to save for better tomorrow. The habit of saving has an educative value for thrift. It endeavors to bring an attitudinal change in life. It enables individuals to assess future specific needs and to build up a financial provision for the purpose. The habit of saving becomes a way of life and harnesses the meagre resources to build up better future. During the days of rising prices, small savings serve as instrument to mop up the extra purchasing power. In addition to wage a war against poverty, waste, unwise spending, hoarding and other activities, habit of saving also enables family budgeting and postponing expenditure which can be deffered in favour of better utilisation in future. To strengthen the urge for thrift and streamline the social security, the disadvantaged need freedom from exploitation and Art.46 of the constitution enjoins the State to protect the poor from all forms of exploitation and social injustice. Investment agencies or commercial banks are intermediaries between savers and investors. They embark upon deposit mobilisation campaign to mop up the limited resources. Commercial banks or financial investment agencies, be it public sector or private ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the general public sought to be secured by imposing restrictions and the reasonableness of the quality and the extent of the fetters imposed by the directions. The credit worthiness of R.N.B.Cs. undoubtedly would be sensitive. It thrives upon the confidence of the public, on the honesty of its management and its reputation of solvency. The directions intended to promote ``freedom'' and ``facility'' which are required to be regulated in the interest of all concerned. The directions as a part of the scheme of the Act would be protected from the attack. Vide Latafat Ali Khan Ors. v. State of U.P., [1971] Suppl. SCR 719. The R.N.B.C. is required to conduct its business activities in the interest of the depositors or subscribers who are unorganised, ignorant, gullible and ignorant of the banking operations. If, however, the acts of R.N.B.C. is detrimental to the interest of the depositors, etc. the R.B.I. has power in Chapter 3B to issue directions and the R.N.B.C. is bound to comply with the directions and non- compliance thereof visits with penal action. Admittedly except Peerless General Insurance, the other companies do not have either paid-up capital or reserve fund worth the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the region of over Rs. 132 crores. The difference between the inspection and the balance-sheet would be due to actuarial principle. It had committed default to pay to its depositors to the tune of Rs. 5.4 crores, which is a gross under-estimate. Sri Somnath Chatterjee, the learned Senior Counsel for the Peerless and adopted by other counsel, contended that paragraphs 6 and 12 are totally unworkable. Its compliance would jeopardise not only the existing companies but also the very interest of the depositors and large workmen. No new company would be set up. The direction given in the first Peerless case was to keep in view the interest of the workmen as well; in effect it was given a go-bye. At least 25% of collections would be left over as working capital of the company, to carry on its business in a manner indicated by the impugned judgment, so that no depositor would lose his money and no workmen would lose his livelihood and it will be in consonance with public interest. Shri G.L. Sanghi, the learned Senior Counsel for Timex, contended that 50% of collection would be necessary to comply with the impugned directions and another company pleaded for 40%. Further contention of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the R.N.B.C. to pay back to the subscribers/depositors at any given time; safety of the subscribers' money and his right to unencumbered repayment are thus of paramount public interest and the directions aimed to protect them. The directions cannot and would not be adjudged to be ultra vires of arbitrary by reason of successful financial management of an individual company. An over all view of the working system of the scheme is relevant and germane. The obligation in paragraph 12 of periodical disclosure in the accounts of a company of the deposits together with the interest accrued thereon, whether or not payable but admittedly due as a liability, is to monitor the discipline of the operation of the schemes and any infraction, would be dealt with as per law. The certificate by a qualified Chartered Accountant is to vouchsafe the correctness and authenticity of accounts and would and should adhere to the statutory compliance. The settled accounting practice is that a loan or deposit received from a creditor has to be shown as a liability together with accrued interest whether due or deferred. The actuarial accounting applies to revenues and costs to which the concept of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t time, and fastens an incidental and consequential obligation to mop up paid up capital or investment towards establishment and commission charges to tide over teething trouble. But that is no ground to say that it is impossible for compliance, nor could it be said that the directions are palpably arbitrary or unreasonable. Anyone may venture to do business without any stake of his own but is subject to the regulations. A new company without any paid up capital, no doubt,cannot be expected to come into existence nor would operate its business at initial existence with profits. Clause (c) of the provision to paragraph 6(1) of the directions gives freedom on leeway to invest or rotate, not more than 20 per cent of collections etc. in any profitable manner at its choice as a prudent businessman to generate its resources to tide over the teething troubles till it is put on rail to receive succor to its existence, without inhibiting the company's capacity to mop up small savings, and the directions do not control its operation. The only rider is the approval of the Board of Directors which is inherent. Absence of imposition of any limit on quantum of deposit with reference to paid up c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business itself. Therefore, they are neither palpably arbitrary nor unjust not unfair. The mechanism evolved in the directions is fool-proof, as directed by this court in first Peerles case, to secure the interest of the depositors, as well is capable to monitor the business management of every R.N.B.C. It also, thereby, protects interest of the employees/field staff/commission agent etc. as on permanent basis overcoming initial convulsions. It was intended, in the best possible manner, to subserve the interest of all without putting any prohibition in the ability of a company to raise the deposit, even the absence of any adequate paid up capital or reserve fund or such pre-commitment of the owner, to secure such deposits. Thus the directions impose only partial control in the public interest of the depositors. The deposits invested or keep invested qua the company always remained its fund till date of payment at maturity or premature withdrawal in terms of the contract. The effect of the impugned judgment of the Calcutta High Court namely redefinition of the aggregate liabilities as contractual liabilities due and payable would have the effect of requiring the R.N.B.Cs. to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms of Government are practical and do require rough accommodation. Illogical it may be and unscientific it may seem to be, left to its working and if need be, can be remedied by the R.B.I. by pragmatic adjustment that may be called for by particular circumstances. The impugned directions may at first blush seem unjust or arbitrary but when broached in pragmatic perspective the mist is cleared and that the experimental economic measure is manifested to be free from the taints of unconstitutionality. Para 19 of the directions empowers the RBI to extend time for compliance or to exempt a particular company or a class thereof from all or any of the provisions, either generally or for a specified period subject to such conditions as may be imposed. Power to exempt would include the power to be exercised from time to time as exigencies warrant. An individual company or the class thereof has to place necessary and relevant material facts before the R.B.I. of the hardship and the need for relief. A criticism of arbitrariness or unreasonableness may not be ground to undo what was conceived best in the public interest. What is best is not always discernible. The wisdom of any choice may be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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