Saturday, September 24, 2016

The Inapplicability of Money Lending Laws to Regulated NBFCs

[The following guest post is contributed by Munmi Phukon, who is a Senior Manager in the Corporate Law Division at Vinod Kothari & Co.]

Introduction

In 2011, a landmark judgment of the Gujarat High Court in Radhe Estate Developers Vs. Versus Mehta Integrated Finance Co. Ltd. and Ors (the ‘Gujarat Ruling’) contested the very fact of applicability of the Bombay Money Lending Act, 1946 (the ‘Bombay Act’) to non-banking finance companies (‘NBFCs’). In general, money lending laws are concerned with protecting the interests of borrowers by imposing a ceiling on interest rates, mandatory licensing requirement for money lenders, and making further and better provision for the control of money-lenders and for the regulation and control of money-lending in the respective States. These laws also place an embargo on the Court’s power to entertain a suit where the money lender is an unlicensed one.

Article 246 of the Constitution empowers the Parliament and Legislatures of the States to make laws in respect to any of the matters enumerated in List-I and List-II in the VII Schedule respectively. List-III in the said Schedule is a concurrent list in relation to which Parliament and Legislatures of the States both have the powers to make law. The matters related to money lending and money lenders are included in Entry 30 of List II. Therefore, the States may enact their own laws related to money lending and money lenders. 

The Gujarat Ruling

The matter contested in the Gujarat Ruling related to the applicability of the Bombay Act to an NBFC which is already regulated by a central law, namely the Reserve Bank of India Act, 1934 (‘RBI Act’).  The Court held that a State Act is always subject to a Central Act. After referring the provisions of Chapter IIIB of the RBI Act, held that the Reserve Bank of India (‘RBI’) has already occupied the field with regard to control over the NBFCs and all types of regulatory measures, including penal action. Therefore, the State law cannot transgress on the field occupied by the law of Parliament. In view of Section 45Q of the RBI Act, the provisions of Chapter IIIB held to be have an overriding effect on the State law.

The Court further noted that there was no notification issued under Section 2(10)(b) of the Bombay Act bringing an NBFC within the definition of ‘money-lender'. The Court therefore held that in the absence of any such notification, the State Government or its authorities have no jurisdiction to take any regulatory or penal measures under the said Act. This was the primary ground for the Court to conclude regarding the inapplicability of the Bombay Act to NBFCs. Therefore, the Gujarat Ruling still left a scope for applicability of the State law to an NBFC if any notification under the aforesaid section comes at a later date.  

Developments Following the Gujarat Ruling

The Gujarat Ruling was decided on April 26, 2011 and thereafter, on May 2, 2011, the new Gujarat Money Lenders Act, 2011 (‘GML Act’) was introduced repealing the erstwhile Bombay Act. Meanwhile, there was another special civil application pending with the Gujarat High Court in the matter of Sundaram Finance Limited & others vs. State of Gujarat, wherein there was a prayer for declaring that the provisions of the GML Act and its applicability to the NBFCs registered with RBI are illegal as ultra vires the Constitution, and unconstitutional in the absence of legislative competence.

It is to be noted here that the GML Act has prescribed the definition of ‘company’ to mean a company as defined under the Companies Act, 1956 and a ‘money lender’ to include a ‘company’. The GML Act also provides for a doctrine of implied registration for the NBFCs registered with RBI. Further, the definition of a ‘loan’ excludes the deposit of money or other property in banks, but not the activities of a company registered under Chapter IIIB of the RBI Act such as NBFCs. Apparently, the enforcement of the new GML Act had created lots of complexity.

The Court held that the new GML Act is ultra vires the Constitution for legislative incompetence of the State Legislature, only to the extent that it seeks to have control over the NBFCs registered under RBI Act in the matter of carrying on their business. The Court held that exercising rights as an NBFC is within the purview of the RBI Act, and therefore they are bound to follow guidance of RBI and that no other State law can interfere with its business activities if it conforms to the provisions of the RBI Act. Thus, within the scope of the activity of an NBFC as provided in the RBI Act, the State Legislation has encroached upon the RBI’s role by imposing its control over it in addition to that imposed under the RBI Act and thereon the direct repugnancy arises.

It is worthwhile noting that the decision of Kerala High Court in the case of M/S. Sundaram Finance Ltd vs State Of Kerala stood contrary to what the Gujarat High Court held in the aforesaid cases. The Kerala High Court held that the Kerala Money Lenders Act, 1958 is not without force, and that both the RBI Act and the provisions of the Kerala Money Lenders Act simultaneously apply to NBFCs.

The Law Operating in West Bengal

In August, 2015, there was a ruling of Calcutta High Court in the matter of M/S. Arjun Shyam & Co. (P) Ltd vs M/S. Sagar Trading Co. & Ors. The matter was primarily based on the question of maintainability of application as also the suit, considering the provisions contained in the Bengal Money Lenders Act, 1940 (BML Act) with respect to mandatory licence requirement for the money lenders. A question was also raised with regard to encroachment upon the activity of an NBFC duly registered with RBI to recover the money lent merely due to the lack of possession of a licence under the BML Act.

The Court held that the NBFCs are not covered by the definition of 'money-lenders' as provided in the BML Act. Similar to the Gujarat High Court, this Court also held that RBI Act has an overriding effect over any law inconsistent therewith for the time being in force or any instrument having effect by virtue of any such law. It was held that once an NBFC holds the licence, it can carry on the business anywhere in the country. Unless a State legislature specifically requires an NBFC to obtain a licence under the State legislation, the claim of an NBFC to realize money cannot be defeated. Even though the decision of the Court was in favour of the petitioner NBFC, however, it still provides a room for ambiguity: for example, what if the BML Act is amended to the effect of including an NBFC under its purview?

In L & T Finance Limited versus M/s. Saumya Mining Ltd. and others, the Bombay High Court relied on the interpretation of the Gujarat High Court in the matter of Sundaram Finance Limited & others vs. State of Gujarat as discussed aforesaid and held that if the laws passed by the Parliament are to operate over the earlier laws made by the State Government, it would be reasonable to hold that the companies which are covered under chapter IIIB of the RBI Act would not be falling under the BML Act, as the term ‘money lending’ under the provisions of the BML Act and the Bombay Act are in pari materia.

Further, there was a special civil application in the matter of Fullerton India Credit Company Limited and Ors. vs State of Gujarat, wherein the writ petitioners have prayed for issue of an appropriate writ, order or direction declaring that NBFCs registered with RBI would not come within the purview of GML Act. There was also a prayer for declaration that the provisions of the GML Act, 2011 and its applicability to the petitioners are illegal and ultra vires the Constitution. The Chief Justice relied on the decision of the same Court in Sundaram Finance Limited & others vs. State of Gujarat declaring the GML Act as ultra vires the Constitution for legislative incompetence of the State Legislature to the extent it seeks to have control over the NBFCs registered under the RBI Act.

While the Gujarat High Court in the later case made it clear, however, the decision of the Calcutta High Court still left a scope for inclusion of NBFCs under the purview of the State law. Therefore, until a notification is brought into place, the registered NBFCs operated in Bengal would remain out of the purview of the BML Act, and accordingly the provisions of the same would not apply to such NBFCs.

Conclusion

It seems that the non-applicability of the provisions of state laws only relates to those NBFCs which are regulated by the RBI by virtue of being registered with RBI. Therefore, those entities which are not so regulated by RBI and carrying on the activities of lending will still get covered under the state laws and they cannot take benefit of the aforesaid decisions of the Courts.   


- Munmi Phukon

1 comment:

vswami said...

To share instant thoughts :
Having read, and somewhat in depth the indicated key portions of, the write-up, it is considered inevitable to raise for due consideration, the POSER:
Of what relevance could any such old legislations dating back to years 1934, 1946, so on , have today; and could be or continue to be of any material utility for courts to decide any money -related issues of recent times, more so, having regard to/in the context of what the Constitution, again of a later origin, provides or envisages !
(may be contd.)