TMI Blog1971 (1) TMI 122X X X X Extracts X X X X X X X X Extracts X X X X ..... subscribers or by draw. After deducting the discount which is either a fixed percentage of the capital or the difference between the capital and the price amount, the prize amount is taken by the successful bidder in full satisfaction of his claim under the chit, but subject to his liability to pay future instalments. The person who conducts the chit is called the foreman. It is the duty of the foreman to collect the subscriptions from every subscriber, to conduct and manage the chit, to keep regular accounts and to pay the prize amount to the subscriber concerned whether or not the other subscribers have paid the instalments due. If all the subscribers pay the instalments due without default, there will be no problem for the foreman in paying the prize amount to the subscriber entitled thereto. But it is often found that 15 to 20 per cent. of the subscribers default in payment of instalments. Before drawing the prize amount, the successful subscriber is required to furnish security for due payment of future subscriptions till the culmination of the chit. Sometimes subscribers are unable to furnish the necessary security and allow the prize amounts to remain with the fund on intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commencement under Section 7, execute an indenture of mortgage and trust in favour of the Registrar as trustee charging by way of security, property sufficient to the satisfaction of the Registrar for the realisation of the chit amount or deposit in any approved bank an amount of cash not less than half of the chit amount or invest in Government securities of the face value or market value, whichever is less, of not less than half of the chit amount, and transfer the amount so deposited or the Government securities in favour of the Registrar to be held in trust by him as security. Section 12(2) provides that where a foreman conducts more than one chit, he shall furnish security in respect of each such chit. The rights of the foreman mentioned in Section 13 are to obtain the chit amount at the instalment specified in the chit agreement, to charge commission or remuneration not exceeding five per cent. of the chit amount, to receive and realise all contributions from the subscribers and to distribute the prize amounts to the prized subscribers and the dividend among the subscribers, to demand sufficient security from any prized subscriber for the due payment of future subscriptions a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a new Chapter III-B was introduced after Chapter III-A in the Reserve Bank of India Act, 1934 (hereinafter referred to as the Act ). The new Chapter contains Sections 45H to 45Q relating to non-banking institutions and financial institutions receiving deposits from third parties. The relevant portions of the impugned provisions are set out below. 6. Section 45-I(c) defines financial institution as follows: ' Financial institution ' means any non-banking institution- (i) which carries on as its business or part of its business the financing, whether by way of making loans or advances or otherwise, of trade, industry, commerce or agriculture ; or (ii) which carries on as its business or part of its business the acquisition of shares, stock, bonds, debentures or debenture stock or securities issued by a Government or local authority or other marketable securities of a like nature ; or (iii) which carries on as its principal business hire-purchase transactions or the financing of such transactions. 7. In 1969 after Section 45I(c)(iii) an Explanation was added and the Explanation runs as follows : Explanation.--For the removal of doubts, it is he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on notified by the Central Government under Section 51 of the Banking Regulation Act, 1949 (10 of 1949), or from a co-operative bank as defined in Clause (vii) of Section 2 of the Reserve Bank of India Act, 1934 (2 of 1934), or from any person registered under any law relating to money-lending which is for the time being in force; (iv) any loan received from the Industrial Development Bank of India established under the Industrial Development Bank of India Act, 1964, or the Industrial Finance Corporation of India established under the Industrial Finance Corporation Act, 1948, or a State Financial Corporation established under the State Financial Corporations Act, 1951, or the Industrial Credit and Investment Corporation of India Ltd., or the Madras Industrial and Investment Corporation Ltd.; (v) any loan received by a holding company from its subsidiary or by a subsidiary from its holding company or by a company from a subsidiary of any of its subsidiaries or from a subsidiary of its holding company or from a subsidiary of the holding company of its holding company or by a company from a holding company of its holding company ; (vi) any loan received by a Government compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... repayable not earlier than twelve months from the date of such renewal, and (c) no non-banking financial company not being a hire-purchase finance company or a housing finance company shall receive any deposit which together with any other deposits already received and outstanding on the books of the company is in excess of twenty-five per cent, of the aggregate of its paid-up capital and free reserves. 4. (3) Every non-banking financial company, not being a hirepurchase-finance company, or a housing finance company, which on the date of commencement of these directions holds deposits in excess of twenty-five per cent. of its paid-up capital and free reserves shall secure before the expiry of a period of two years from the date of such commencement, by taking such steps as may be necessary for this purpose, that the deposits received by the company and outstanding on its books are not in excess of the aforesaid limit. 5. Particulars to be specified in advertisement soliciting deposits.--No non-banking financial company and no other person on behalf of such a company shall issue or cause to be issued any advertisement soliciting or inviting deposits unless such advertiseme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... registered office of the company and shall be preserved in good order for a period of not less than eight calendar years following the financial year in which the latest entry is made of the repayment or renewal of any deposit of which particulars are contained in the register: Provided that if the company keeps the books of account referred to in Sub-section (1) of Section 209 of the Companies Act, 1956 (1 of 1956), at any place other than its registered office in accordance with the proviso to that sub-section, it shall be sufficient compliance with this clause if the register aforesaid is kept at such other place, subject to the condition that the company delivers to the Reserve Bank a copy of the notice filed with the Registrar under the proviso to the said sub-section within seven days of such filing. 8. Information to be included in the Board's Report.--(i) In every report of the board of directors laid before a company in general meeting under Sub-section (1) of Section 217 of the Companies Act, 1956 (1 of 1956), after the date of commencement of these directions, there shall be included in the case of a non-banking financial company, the following particulars or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enied therein that the Non-Banking Financial Companies (Reserve bank) Directions, 1966, are illegal and inoperative, that the same are ultra vires the powers conferred on the Reserve Bank under Sections 45J, 45K and 45L of the Act, that the amendment of the Reserve Bank of India Act by insertion of Chapter III-B became imperative to protect members of the public dealing with such companies, that the insertion of Chapter III-B is to control non-banking institutions in so far as they borrow from and lend out moneys to the public, and that the petitioners are not only non-banking companies but financial institutions as defined in the Act, and that even otherwise Sections 45J and 45K will apply to them. It is also contended that Chapter III-B does not relate to the chit subscriptions and the chit fund activities of the foreman but is intended to control and regulate deposits which include every kind of borrowing, that each chit run by the petitioners is a separate transaction and self-financing, the foreman being entitled to 5 per cent. or any other fixed ratio of the collections as his remuneration, that the foreman grants loans to subscribers either to pay up instalments or furnish s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r as it legislates on the activities of the foreman running chits, intrenches upon entry 30 of List II exclusively reserved for the State and the impugned enactment is, therefore, ultra vires. (2) The pith and substance of the impugned enactment entrenches in any event upon entry 26 of List II (Trade and Commerce). (3). The Union, under the guise of enacting a regulatory measure, has legislated upon the borrowing and lending activity of the stake-holder which is part and parcel of the business of running chits. Thus the impugned legislation under the guise of regulating an activity of the foreman in effect entrenches upon a subject reserved for the State and is a colourable one liable to be struck down. (4) Even if the impugned provisions are valid, the directions issued are invalid. (5) There is no need to control the activities of the foreman of chit, in view of the Madras Chit Funds Act, 1961. (6) The Government in their supplemental counter-affidavit did not categorically specify the entry under which the impugned enactment falls except stating that the matters covered by the Madras Chit Funds Act, 1961, are separate from those covered by the impugned provisions. 18. Mr. V.K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must be read together without giving a narrow meaning to any of them--vide State of Bombay v. Balsara . (4) Before an Act is declared ultra vires on the ground that it invades any exclusive sphere, there should be an attempt to reconcile the two conflicting jurisdictions and only if such reconciliation is impossible, the Act should be declared invalid--vide Ralla Ram v. Province of East Punjab. 21. The contention of Mr. Nambiar is that the impugned provisions made by Parliament entrench upon entry 30 of List II of the Seventh Schedule. In this connection, reference was made to the decision of the Privy Council in Prafulla Kumar v. Bank of Commerce. In that case the Privy Council, in dealing with the extent to which the Bengal Money-Lenders Act, 1940 entrenched upon the matters reserved to the federal legislature, namely, items 28 and 36 in List I of Schedule VII in the Government of India Act, 1935, quoted with approval the following passage from the judgment of Sri Maurice Gwyer C.J. in Subramanyam Chettiar v. Muthuswami Goundan : ' It must inevitably happen from time to time that legislation though purporting to deal with a subject in one List, touches also on a subje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e content. 23. Mr. Nambiar referred to Waverly Jute Mitts Co. Ltd. v. Raymon Co. (India Ltd.) and he cited the following passages therein : It is next argued for the appellants that even if a law on forward contracts can be said to be a law on futures markets, it must be held to be legislation falling under entry 26 in List II, and not entry 48 in List I, because forward contracts form a major sector of modern trade, and constitute its very core, and to exclude them from the ambit of entry 26 in List II, would be to rob it of much of its contents......As the two entries relate to the powers mutually exclusive of two different legislatures, the question is how these two are to be reconciled. Now it is a rule of construction as well established as that on which the appellants rely, that the entries in the Lists should be so construed as to give effect to all of them and that a construction which will result in any of them being rendered futile or otiose must be avoided. It follows from this that where there are two entries, one general in its character and the other specific, the former must be construed as excluding the latter. This is only an application of the general m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provincial committees had also suggested the establishment of the Reserve Bank. The committee ended by saying: ' We accordingly consider it to be a matter of supreme importance from the point of view of the development of banking facilities in India, and of her economic advancement generally, that a Central or Reserve Bank should be created at the earliest possible date. The establishment of such a bank would by mobilisation of the banking and currency reserves of India in one hand tend to increase the volume of credit available for trade, industry and agriculture and to mitigate the evils of fluctuating and high charges for the use of such credit caused by seasonal stringency.' (Vol. I, Part I, Chap. XXII, para. 605) The White paper of Indian constitutional reforms also recommended the establishment of a Reserve Bank ' free from political influence '. As a result of these findings, when a fresh Bill was introduced by Sir George Schuster on September 8, 1933, it was accepted and received the assent of the Governor-General on March 6, 1934. The functions of the Reserve Bank were generally indicated in the preamble as the regulation of the issue of bank not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary from country to country and from period to period, depending on the stage of development, the structure of the economy, the goals to which the Government are committed, and the current general economic situation, but even so a broad identity of approach is discernible. ..It is generally agreed that a central bank's objectives should be to promote or facilitate a high growth rate, full employment, price stability and a viable external payments position. It is recognised that these objectives often clash and a working optimum has to be aimed at. According to the preamble to the Reserve Bank of India Act, the main function of the bank is to regulate the issue of bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage. 28. The Reserve Bank of India having thus been vested with comprehensive powers to regulate and control the receipt of public deposits by banking institutions, the question as to the need of the Reserve Bank to regulate deposits received by non-banking companies was considered. Some of these non-banking institutions accept deposits from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Das J. Observed: The doctrine of pith and substance postulates, for its application, that the impugned law is substantially within the legislative competence of the particular legislature that made it, but only incidentally encroached upon the legislative field of another legislature. The doctrine saves this incidental encroachment if only the law is in pith and substance within the legislative field of the particular legislature which made it. 29. We are of opinion that the impugned provisions in pith and substance relate to control of currency by the Reserve Bank and fall under entries 38 and 36 of List I of the Seventh Schedule, and that they do not in any way entrench upon entry 30 of List II. 30. Mr. Chari further contends that chit funds fall under entry 7 of List III and not under entry 30 of List II. He points out that a fund is constituted by the subscriptions received from subscribers and that, when that fund is auctioned at a discount and the highest bidder gets the prize amount, the successful bidder is entitled to be paid the prize amount on furnishing security and executing a bond binding himself to pay future instalments without default. The foreman, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Funds Act and contended that there is no element of trade involved in the various provisions. We agree with him and hold that the impugned provisions do not entrench upon entry 26 of List II and that chit funds do not fall under entry 26 of List II. 33. Mr. Nambiar further contends that the impugned provisions are colourable. In this connection he relies upon Attorney-General for Alberta, v. Attorney-General for Canada , where the principles relating to colourable legislation have been fully considered. In this connection Mr. Nambiar refers to page 75 of Lefroy on the Canadian Constitution. Mr. Nambiar's contention is that, though apparently a legislature in passing a statute, purported to act within the limits of its powers, yet, in substance, it transgresses its power, the transgression being veiled by what appears on a proper examination to be a mere pretence or disguise. In this connection the learned counsel refers to Gajapati Narayan Deo v. State of Orissa . Mr. Chari contends that the attack on the impugned provisions on the ground that they are colourable cannot be sustained, as nothing is sought to be done indirectly. In the view we have taken that the impugned le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and money-lender have been defined under Sections 2(6) and 2(8), to illustrate the distinction between money-lending and money borrowing and that the running of chit funds do not fall under the Madras Money-Lenders Act. We are of opinion that there is a distinction between money-lending and money borrowing and the impugned provisions in so far as they control money borrowing in the state of deposits from third parties and lending the same are valid. 39. Mr. Nambiar attacks the validity of Amending Act 4 of 1968 in adding an Explanation to Section 45-I(c) which has been extracted in the earlier part of this judgment. Mr. Chari contends that the amendment was made for removal of doubts and the definition of financial institutions was clarified to include chit funds . In this connection, the learned counsel refers to Maxwell on the Interpretation of Statutes, 12th edition, at pages 224 and 225, where the following passage occurs: Similarly, Section 6 of the Finance Act, 1898, provided, for the removal of doubts, that the definition of ' conveyance on sale' in the Stamp Act, 1891, included an order for foreclosure. It was held that Section 6 was declarator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds functioning in Tamil Nadu only these three petitioners have raised objections regarding the control by the Reserve Bank over their activities. The petitioners themselves call the amounts received from the public as deposits out of which a small fraction alone is utilised by the foreman to what he calls for tiding over his financial difficulties and for meeting the demands of the subscribers. The bulk of the amounts received as deposits from the public is lent out to third parties at higher rates of interest. The fixed deposit receipts issued by the petitioners are similar to such deposit receipts issued by banking institutions, and what the petitioners have been doing is only banking business. The impugned provisions controlling such activities are, therefore, fully justified. 42. Mr. Chari referred us to various inquiries conducted by the Reserve Bank subsequent to 1964, as a result of which the directions styled as (a) The Non-Banking Financial Companies (Reserve Bank) Directions, 1966, and (b) The Non-Banking Companies (Reserve Bank) Directions, 1966, were issued. In this connection the learned counsel quoted the following extract from Vaswani's Indian Banking S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which have been made in the earlier part of this judgment. The Non-banking Financial Companies (Reserve Bank) Directions, 1966, apply to all non-banking financial companies irrespective of the fact whether they accept deposits from the public or not and include chit funds, hire-purchase finance, housing finance, investment, loan, miscellaneous financial and mutal benefit financial companies. Mr. Nambiar attacks the above notification, particularly Clause 2(1 )(f) defining deposit, Clause 3(b) relating to acceptance of deposit and Clause 4(3) calling upon non-banking financial institutions to deposit 25 per cent. of their paid up capital and contends that these provisions go beyond the Act. He further contends that the well known distinction between deposit and loan mentioned in the Limitation Act has not been preserved in the notification and referred to the decision of the Privy Council in Suleman Haji Ahmed Umer v. Haji Abdulla Haji Rahimtulla. We are of opinion that the distinction between loan and deposit provided in the Limitation Act is only for the purpose of giving different periods for recovery of such loans and deposits and that the impugned directions are not invalid on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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