ivil Appeal Nos
3562  3563 of 1986 etc
From the Judgment and order dated 23 5 86 of the Calcut ta High Court in FMAT No 824 and 82586 K Parasaran Attorney General G Rama Swamy Addition al Solicitor General section Roy Chowdhary Som Nath Chatterjee SN Kacker AK Ganguli Sankar Ghosh NN Gooptu TK Banner 11 jee AK Sil HS Parihar A Mitra G Joshi section Roy A Subba Rao P Parmeshwaran Bhaskar Gupta P Basu A Chatterjee B Lehari section Sukumaran Dilip Sinha JR Das KR Nambiar HK Puri PK Pillai SK Jain and JR Das for the appearing parties
The Judgments of the Court were delivered following KHALID J I agree with my learned brother in his con clusion
However I would like to add that short post script of my own
In the main Judgment the sinister aspects of the Peer less scheme have been brought out in great detail as well as the improvements attempted
What disturbed me most was the plight of the innumerable subscribers who lose their money by the operation of the scheme under consideration
When I say this I feel concerned of those situated far and wide in the remote villages of the country uninitiated into the mysteries of financial schemes who are lured by the prom ises of easy money and decide to pay the first instalment by the encouraging words of the agents who forget them there after because of the disincentive commission they get after the first instalment is paid who therefore do not pursue these depositors to make subsequent deposits promptly
It is some consolation that the Peerless is trying to bring in reforms to reduce some of the vicious aspects of its scheme
While referring to the plight of the depositors I do not at the same time ignore the large number of employees employed by the company
The only reason why the appeals are being dismissed is on the wording of Section 2e of the Act
A close study of the definition makes the conclusion inescapable that the Peerless scheme does not come within it
Any attempt to bring the activities of the Peerless within the definition has only to fail
This position gets support from two Judg ments rendered by benches of three Judges of this Court viz Srinivasa Enterprises and others vs Union of India etc 1 and State of West Bengal vs Swapan Kumar Guha  Any attempt to distinguish the ratio of these two cases for the purpose of these ap peals cannot succeed
In the case of Srinivasa Enterprises this Court was considering the identical section
I do not think it would be proper to refer to the observations in this Judgment on this section either as obiter or per incu rium
The position canvassed before us thus strictly is not res integra and is covered by these two Judgments more particularly in Srinivasa Enterprises
Life Insurance Corporation is not a party before us
But its 12 activities in certain spheres were brought to our notice by the learned counsel for the appellants
The Reserve Bank of India is the main appellant
The Union of India and the State of West Bengal have in tandem supported the Reserve Bank of India against the Peerless
When the activities of the Peerless and the Life Insurance Corporation are consid ered juxtaposed one is tempted to observe that Peerless is less harsh than the Life Insurance Corporation
The Life Insurance Corporation enjoys many privileges
It has a duty to be above suspicion
It has a duty to serve people in the right manner
I am constrained to observe from my experi ence that I have found the Life Insurance Corporation heartless whenever claims are made against it
I fully agree with the observations made by my learned brother regarding some of the aspects of the Life Insurance Corporation schemes
I wish only to emphasise that the LIC should at least in future be liberal and generous when claims are made by those unfortunate few who when robbed of their bread earners claim for the insured amount and who are invariably met on technical pleas of concealment of ailment and the like
The Life Insurance Corporation does not come out with glory when some of its dealings are considered
I do not think it would be proper to make more harsh reference about the Life Insurance Corporation when it is not a party before us
1 felt it necessary to make these observations with utmost restraint since an opportunity afforded itself in this case
I share my brother s concern about the mushroom growth of financial companies all over the country
Such companies have proliferated
The victims of the schemes that are attractively put forward in public media are mostly middle class and lower middle class people
Instances are legion where such needy people have been reduced penniless because of the fraud played by such financial vultures
It is neces sary for the authorities to evolve fool proof schemes to see that fraud is not allowed to be played upon persons who are not conversant with the practice of such financial enter prises who pose themselves as benefactors of people
CHINNAPPA REDDY J
The question is Is a prize less chit a prize chit So posed the answer appears to be self evident
That is what it is in the ultimate analysis The Peerless General Insurance  Investment Co Ltd  was incorporated in 1932
After the nationalisation of the business of life insurance the name of the company was changed to the Peerless General Finance  Investments Co Ltd  For over a quarter of a 13 century now the business of the company has been that of finance  investment 
The company offers three schemes the principal of which is the Endowment Certificate Scheme
Under this scheme a subscriber is required to pay a fixed annual subscription for a fixed number of years varying between the minimum of 10 years and the maximum of 30 years
On the expiry of the period the subscriber will be paid by the company a sum of money called the Endowment Sum which is the face value of the Certificate
The subscriber is also entitled to be paid a guaranteed fixed bonus
For example an annual subscription of Rs77 for 10 years will fetch the subscriber at the end of the 10 year period a sum of Rs 1000 as endowment sum and a sum of Rs 100 as bonus making a total of Rs 1100
If any instalment that is any amount of annual subscription is not paid within the stipulated period and period of grace the Certificate lapses unless it has acquired a surrender value
A Certificate acquires surrender value after the expiry of three years from the date of commencement if the subscription for two full years has been paid
A Certificate which has not acquired surren der value lapses on non payment of instalments and the amounts paid become forfeit to the company
A lapsed certif icate may however be revived at any time before the expiry date of maturity on payment of all dues together with inter est at one paisa per rupee per month
There is also provi sion in the scheme for conversion of the Certificate into a paid up Certificate the paid up amount to be paid at the end of the period but without bonus
A person purchasing a Certificate automatically becomes entitled to a free acci dent insurance policy under a group insurance scheme
A noticeable feature of the scheme is the remarkably low yield to the subscriber on his investment
In the example that we gave we said a subscriber investing Rs77 every year for ten years will get at the end of the tenth year a return of Rs 1000 by way of Endowment Sum  and Rs 100 as bonus
Treating the total sum of Rs 1100 as the amount which the investor gets back on his ten year annual invest ment of Rs77 the yield on his investment works out at compound interest of about 6 or simple interest of a little over 7
This is on the assumption that he does not commit default but pays his annual subscription regularly
But consider what happens to the investments of those who commit default a subscriber who defaults in payment of annual subscription after payment of the first subscription for feits the subscription previously paid by him
A subscriber who pays the first two subscriptions but commits default thereafter is entitled to have a refund of the subscriptions paid by him but only at the end of the full endowment peri od
That is to say the amount invested by the subscriber upto the 14 time of default will be with the company earning interest for the company but nothing for the subscriber himself
The subscriber who commits default after payment of two annual subscriptions is entitled to have the surrender value paid to him after the expiry of three years from the date of commencement
The surrender value is 90 of the subscrip tions paid by him excluding the first year s subscription
In other words if a subscriber who commits default after payment of two subscriptions opts for immediate payment after three years he forfeits his first year s subscription and 10 of the subsequent years  subscription
On the other hand if he opts for payment at the end of endowment period he will get a refund of the subscriptions paid by him but without interest and without bonus
If he commits default after paying three years  subscription but opts for payment at the end of the Endowment period he will get back a pro portionate part of the Endowment Amount and this without bonus
The yield will be very much lower than the 6 com pound interest or 7 simple interest that we mentioned earlier
The subscriber is always at the losing end
It is a perfect case of Heads I win tails you lose 
At this stage it may be useful to refer to the business practices and the working results of the company
The compa ny advertises its schemes widely in beguiling terms
The public are told The schemes are open to any person of Indian Nationality without any restriction of caste creed sex age or health excepting physical disabilities such as loss of limbs dumbness deafness or blindness
They are further told Investment under the Schemes is highly profitable and the return is sure and guaranteed by the Company
There is no element of uncertainty in the matter the terms and conditions of the Certificate are simple liberal and attractive No trouble of Medical Examination Unique advantage of saving as well as earning decent profit etc
A virtual publicity blitz is carried on in the daily and weekly newspapers Peerless an epitome of absolute security Save for your dear ones Savings through Peerless means savings for the progress of the Nation Peerless team works today for India s happy tomor row Save through peerless for national welfare Peer less the choice of the millions etc
The message of Peerless is made to penetrate the rural areas to tap the small savings of the poor ignorant villag ers through a special structure of agents special agents sub organizers organizers special organizers and so on
This field staff appears to be chosen for their social political or official connections
What is of significance is that an agent s commission is 30 of the first year s subscription and 5 15 only of subsequent years  subscriptions
Straightaway this offers an incentive to the agents to concentrate on securing fresh business and a disincentive to collect subscriptions of subsequent years
It is common experience and common knowledge that most rural folk particularly those belonging to the poorer sections of people will not pay their sub scription regularly unless somebody takes the trouble of collecting their subscriptions from them showing the same enthusiasm in doing so as was shown in enrolling subscribers and collecting the first subscription
The incentive of 30 of the collection of the subscription of the first year automatically operates as a disincentive for collecting subscriptions of subsequent years
The results show it and perhaps it is intended to be so
As we have already seen default after the payment of the first subscription results in forfeiture of the first year s subscription
The first subscription is literally shared between the company and its agents and one need not wonder that under the method of accountancy adopted by the Company it is treated as income and not as a liability of the company
We are told that the company has adopted the actuarial  system of accountancy followed by the Life Insurance Corporation
Though we note here that the business of the Life Insurance Corporation is insurance business and therefore different from the business of the company we will have more to say about the policies of the Life Insurance Corporation a little later
For the present we note that the company does not and cannot carry on any insurance business and that it accepts no risk
Let us now take a brief look at the result of the at tractive incentive given to the agents to collect the first year s subscription
A compilation prepared by the Reserve Bank of India which is found at page 457 of the paper book shows that the first year s subscription credited to the profit and loss account during the years 1978 1979 1980 1981 1982 1983 and 1984 was 17 16 2759 4807 8570 12923 12950 and 12647 lakhs while the commission paid to the field force during those years was 1323 2173 3907 6982 9521 9517 and 9392 lakhs respectively and the renewal subscription collected during the years was 1250 1595 2232 3334 5779 8035 and 10140 lakhs respectively
The striking fact that stares at us is that out of the total deposits collected during the years 1978 to 1984 amounting to Rs88737 lakhs a sum of Rs56372 lakhs represents collections of first year subscriptions and 32365 lakhs represents subsequent years  collections
First subscriptions far outweigh renewal subscriptions
This feature almost becomes sinister if we remember that the renewal subscriptions relate 16 not to a single year s certificates but to certificates issued during the 102030 years periods previous to the very relevant year corresponding to 102030 year certifi cates as the case may be
This clearly indicates that the majority of the subscribers commit default after the first year and only a few of the depositors continue their sub scriptions and keep alive the certificates
This gives us an indication as to the class of depositors who are principally contacted and are perhaps intended to be so contacted
Having regard to the class of depositors and the incentives offered to agents for securing fresh business neglect and default of renewal subscriptions is an inevitable result
The agents are interested in securing fresh business because of the High rate of commission in regard to fresh business and are loath to waste their time on collecting subsequent years  subscriptions fetching far less commission
We are told that the terms of the scheme have now been revised and the forfeiture clause has been altogether delet ed with the result that even a subscriber who commits de fault after the first year s subscription becomes entitled to get a refund of the amount at the end of the endowment period
While this may be an improvement on the original scheme we find that agents are even now entitled to a commission of 35 of the first year s subscription
This continued incentive for fresh business will naturally lead to the same result as before that is it will encourage agreements to continue to concentrate on collecting first year s subscriptions to the total neglect of subsequent years  subscriptions
At this point we may refer to one of the schemes market ed by the Life Insurance Corporation of India which appears to be familiarly known in circles connected with deposit schemes as Table No 21 Policy 
We are referring to this policy as it was argued before us that the endowment scheme of the Peerless Company is better conceived in the interests of the investors than the Table No 21 Policy  of the Life Insurance Corporation and yet no one has thought of stopping the Life Insurance Corporation of India from marketing the Policy
For a better appreciation of the submissions which we will consider at a later stage we desire to set out the details of the Policy at this juncture itself in order to compare it with the Endowment Scheme of the Peerless Compa ny
Two things have to be straightaway noticed first the Table No 21 Policy  offered by the Life Insurance Corpora tion is not a life Insurance policy as we generally know it second it is a policy without profits
Under this policy no one need undergo medical examination and no one would be unacceptable for reasons of health only
17 These two features are common to the Peerless Endowment Scheme and the Table No 21 Policy 
Under the Policy the sum assured is payable on the policy holder s surviving the endowment term
No bonus is payable
To secure payment of a sum of Rs 1000 at the end of 10 years the annual premium to be paid is of Rs8390
If the policy holder dies during the first year of the policy 80 of the amount of the premi um will be paid to the heirs
If he dies during the second year of the policy 90 of all the premiums will be paid
If he dies during the third year of the policy the total amount of all the premiums will be paid
If the death occurs after the third policy year the total amount of all the premiums paid together with compound interest at 212  will be paid
If a person commits default in payment of premiums after the expiry of three years having paid the full premi ums in the meanwhile the policy becomes automatically paid up for a reduced amount bearing the same ratio to be assured sum as the number of premiums paid bears to the total number stipulated in the policy
If default is committed within the first three policy years the amounts of premium paid are forfeited
We do not have the slightest doubt that the terms of the Table No 21 Policy  of the Life Insurance Corpora tion are very stringent and much more to the disadvantage of the subscriber than the terms of the endowment scheme of the Peerless Company
We are told that the scheme is primarily devised to enable the subscribers to get tax benefits under various fiscal enactments
Whetever it is it is certainly not intended to tap the savings of the rural poor nor is it designed to benefit them
In fact we find on an examination of some of the Life Assurance Schemes which we were invited to do by the learned counsel that the terms of the policies are heavily loaded against the poorer policy holders
The Manual for Agents describes the Endowment Assurance Policy Tables 11 14 47 and 48 as the most popular form of Life Assurance as it is supposed to make provision for the family of the Life Assured in the event of his early death  and also assures a lumpsum at any desired age 
Now under this Policy if payment of the annual premium ceases after at least three years  premiums have been paid a free paid up Policy for an amount bearing the same proportion to the sum assured as the number of premiums actually paid bears to the total number stipulated in the Policy will be automati cally secured
The amount of course will be payable at the end of the Endowment period only
What is important is that if the Policy holder commits default and does not pay any one of the first three premiums the premiums already paid automatically stand forfeited to the Life Insurance Corpora tion entitling the Policyholders to no benefit
Since it is the poorer class of Policy holders that may ordinarily be expected to commit default in payment of 18 premiums the forfeiture clause in practice operates harshly specially against that class the very class which requires greater security and protection
A perusal of the Report and Accounts  of the Life Insurance Corporation for the years ending March 31 1983 and March 31 1985 which have been placed before us shows that while 2231385 and 2699654 new policies were issued respectively during the two years the number of policies which lapsed or were for feited were respectively 744422 and 8271 19
Thus the number of policies which lapse or are forfeited are roughly thirty percent the number of new policies issued during a year
An analysis of the lapsed and forfeited policies is also given in the Reports
From the report for the year ending March 31 1983 we see that out of the 744422 lapsed and forfeited policies 437004 were issued in the first year previous to the year under review 198949 in the 2nd year previous to the year under review and 83950 in the 3rd year previous to the year under review
From the report for the year ending March 31 1985 we see that out of the 8271 19 lapsed and forfeited Policies 46 1980 were issued in the first year previous to the year under review 235994 were issued in the second year previous to the year under review and 99589 in the third year previous to the year under review
We also notice that in the poli cies issued earlier than the third year before the reviewed year lapses or forfeitures were negligible
Thus we notice that the incidence of lapsing or forfeiture of policies is highest and of a high order in the first three years after a policy is issued
It does not require much imagination to see that the victims of the forfeiture clause in the poli cies are bound to be persons belonging to the poorer sec tions of the people
It does not appear that any special efforts are made by the Life Insurance Corporation to per suade the poorer policy holders not to allow their policies to lapse or be forfeited after paying one two or three premiums
The incentives to agents appear to be for securing fresh business and not for continuing old policies
We cannot help but feel distressed that despite articles 38 39 41 and 43 of the Constitution the Life Insurance Corporation of India an instrumentality of the State which is given the monopoly of Life Insurance business in the country has taken no steps to offer proper security and protection to the needy poor rural folk
If the Life Insurance Corporation is really interested in treating the poorer Policy holders less harshly and more liberally the time has come for the Life Insurance Corporation to revise its terms and conditions and to think in the direction of deleting the forfeiture clause altogether as has now been done by the Peerless Company or to delete it at least from policies for small amounts
Perhaps the Life Insurance Corpora 19 tion may think of short term small amount policies with no forfeiture clause and with some incentive such as a reduced premium for continuing to pay premiums regularly
We are sure that with the management expertise at its command the Life Insurance Corporation of India can devise a myriad ways of serving the poorer sections of the people of our country as also to tap the huge untapped Savings resources the existence of which has been brought home by Companies like the Peerless however wrong headed their business methods might be
It is a matter of common knowledge that the return is a policy holder who survives the period of the policy is very poor
We are now told daily that the Life Insurance Corporation is paying higher bonus year after year
But the learned counsel for Peerless charges that the bonus comes out of the amounts of the ferfeited policies and that it is really the poorer class of defaulting policy holders whose policies are forfeited that are paying bonus to the class of Policy holders who are better of
One wonders if this is not so This surely is not what is contemplated by article 382 of the Constitution which talks of minimising the inequalities in income not only amongst individuals but also amongst groups of people and article 39c which requires the State to secure that the operation of the economic system does not result in the concentration of wealth and means of produc tion to the common detriment
In 1964 by Central Act No 55 of 63 the Reserve Bank of India Act was amended by the addition of Chapter III B consisting of Sections 45H to 45Q
The title of the chapter is Provisions relating to Non Banking Institutions receiv ing deposits and Financial Institutions Section 45Ic defines Financial Institution as follows  Financial Institution  means any non banking institution which carries on as its business or part of its business or any of the follow ing activities namely i the financing whether by way of making loans or advances or otherwise of any activity other than its OW I1 ii the acquisition of shares stock bonds debentures or securities issued by a Government or local authority or other mar ketable securities of a like nature iii letting or delivering of any goods to a hirer under a hire purchase agreement as defined in clausec of section 2 of the  20 iv the carrying on of any class of insurance business v managing conducting or supervising as foreman agent or in any other capacity of chits or kuries as defined in any law which is for the time being in force in any State or any business which is similar thereto vi collecting for any purpose or under any scheme or arrangement by whatever name called monies in lumpsum or otherwise by way of subscriptions or by sale of units or other instruments or in any other manner and awarding prizes or gifts whether in cash or kind or disbursing monies in any other way to persons from whom monies are collected or to any other person but does not include any institution which i is an industrial concern as defined in clausec of section 2 of the  or ii carries on as its principal businees  a agricultural operations or b the purchase or sale of any goods other than securities or the providing of any services or c the purchase construction or sale of immovable property so however that no portion of the income of the
institution is derived from the financing of purchases constructions or sales of immovable property by other persons d firm means a firm as defined in the  e non banking institution means a company corporation or co operative society Section 451e defines Non Banking Institution  as meaning a company corporation or co operative society 
Section 45K empowers the Reserve Bank to collect information from Non Banking Institutions as to deposits and to give directions in the public interest 21 in particular 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  Section 45L empowers the Reserve Bank to call for information from financial institu tions and to give directions in particular directions relating to the conduct of business by them etc
In 1970 the Banking Commission constituted a Study Group headed by Dr Bhabatosh Dutta to review the role of various nonbanking financial intermediaries
The Study Group con fined their study to five classes of Finance Institutions which they considered were important Non Banking Financial Institutions
They were 1
Hire Purchase Finance Institutions 2
Investment Companies 3
Chit FundsKuris 4
Nidhis or Mutual Benefit Funds and 5
Finance Corporations
Proceeding to consider Chit Funds and their working the Study Group identified three classes of Chit Funds a Simple Chits b Prize Chits and c Business Chits
The main features of the three classes of Chits were then de scribed in the following terms a Simple Chits In the simple chit  members agree to contribute to the fund a certain amount at regular intervals
Lots are drawn periodically and the member whose name appears on the chit  gets the periodical collection
His name is then removed from the subsequent lots he however has to continue to pay his sub scriptions
Thus every member gets the whole of the chit amount by tums
There is no loss of capital
Also there is no foreman or even if there is one he does not charge any commis sion
This is a form of mutual help and co operative effort at savings
b Prize Chits In the prize chit  there is a foreman who ostensibly charges no commission and promises to return the whole of 22 the contributions made by a member back to him at the end of a certain period
Peri odically the names of non prized  members are put to draw and the lucky member gets the prize either in cash or in the form of an article of jewellery or utility
Once a person gets a prize he does not have to pay further instalments
The lucky member will get the prize irrespective of the number of instal ments he has paid provided all the due instal ments till the drawal of prize have been paid he will then be exempted from further liability to pay
On the contrary the majority of the mem bers may not have got the prize when the scheme closes though they get back their total contributions without any deduction or its equivalent in the shape of an article
This is a scheme which is nothing short of a lottery which is an offence punishable under Section 294 A of the Indian Penal Code
The name Chit Fund  is rather a misnomer in this case
c Business Chits In this case there is a promoter called foreman who enrols a number of sub scribers and draws up the terms and condi tions of the scheme in the form of an agree ment
Every subscriber has to pay his subscription in regular instalments
The foreman charges for his service a com mission on which there is a ceiling fixed by law in some States
He also reserves the right to take the entire chit amount at the first or second instalment as prize
Depend ing on the terms of agreement a fixed amount is also some times set aside for distribution among the non prized mem bers
After making provision for the above deductions the balance is put to auction except at the last instalment and given as prize to the member who is prepared to forgo the highest discount
The amount of discount is distributed as dividend either among all the members or only among the non prized members
In some States a ceiling has been fixed on the discount that a member can offer
In case more than one person is prepared to offer the same discount or when there are no bidders lots are drawn to choose the prize winning member
The number of subscribers in a chit series equals the number of instalments so that every member is assured of the opportunity of getting the prize
Some times with a view to catering to as many subscribers as 23 possible a chitty comprises a series expressed in terms of a sub division or fraction of a full ticket ticket means the share of a subscriber which entitles the holder thereof the prize amount at any one instalment
In such cases the number of subscribers can exceed the number of instalments
In some cases only auctions are held to determine the prize winner while there are chit funds in which prize winning tickets are determined both by lots and by auction
The Study Group s view was that Chit Funds were not effi cient as saving or lending institutions and that they en couraged consumption spending and in some cases hoarding of scares commodities
The major reason of their popularity was stated to be ignorance of the risk and the disadvantages involved
The ultimate solution they said lies in Commer cial Banks weaning away the Chit Fund subscribers by offer ing attractive deposit and credit schemes
In the meanwhile it was suggested that elimination of Chit Funds would leave credit gap and therefore they should be regulated by appro priate legislation to ensure safeguarding the interest of members and prevent the foreman from enjoying the wide powers that they did at that time
Shortly after the report the Reserve Bank of India purporting to exercise its powers under ss45J and 45K of the Reserve Bank of India Act gave certain directions called Miscellaneous Non Banking Companies Reserve Bank Direc tions 1973
Paragraph 2 of the directions stated Extent of the Directions These directions shall apply to every non banking institution which is a company not being a banking or an insurance company and which carries on any of the following types of business 1 collecting whether as a promoter foreman agent or in any other capacity monies in one lump sum or in instalments by way of contribu tions or subscriptions or by sale of units certificates or other instruments or in any other manner or as membership fees or admis sion fees or service charges to or in respect of any savings mutual benefit thrift or any other scheme or arrangement by whatever name called and utilising the monies so collected or any 24 part thereof or the income accruing from investment or other use of such monies for all or any of the following purposes a giving or awarding periodically or otherwise to a specified number of subscribers as determined by lot draw or in any other manner prizes or gifts in cash or in kind whether or not the recipients of the prize or gift is under a liability to make any further payment in respect of such scheme or arrange ment b refunding to the subscribers or such of them as have not won any prize or gift the whole or part of the subscriptions con tributions or other monies collected with or without any bonus premium interest or other advantage howsoever called on the termina tion of the scheme or arrangement or on or after the expiry of the period stipulated therein 2 managing conducting or supervising as a promoter foreman or agent of any transaction or arrangement by which the company enters into an agreement with a specified number of subscribers that every one of them shall subscribe a certain sum in instalments over a definite period and that every one of such subscriber shall in his turn as determined by lot or by auction or by tender or in such other manner as may be provided for in the agreement be entitled to the prize amount Explanation For the purposes of this sub para graph the expression prize amount shall mean the amount by whatever name it be called arrived at by deduction from out of the total amount subscribed at each instalment by all subscribers a the commission charged by the company as service charges as a promot er or a foreman or an agent and b any sum which a subscriber agrees to forego from out of the total subscriptions of each instalment in consideration of the balance being paid to him
3 conducting any other form of chit or kuri which is different from the type of business referred to in sub paragraph 2 above 25 4 undertaking or carrying on or engaging in or executing any other business similar to the business referred to in sub paragraphs1 to 3
 Paragraph 31i defined a Miscellaneous Non Banking Company  as meaning a company carrying on any of the types of business referred to in paragraph 2 of the directions
Paragraph 4 dealt with acceptance of deposits by Mis cellaneous Non Banking Companies
Paragraph 4a prescribed six months as the minimum period for which a Miscellaneous Non Banking Company could accept a deposit but no maximum period was prescribed
Paragraph 4bii prescribed a ceiling of 25 of the aggregate of the paid up capital and free reserve of the company in the case of deposits accepted by Miscellaneous Non Banking Companies
Paragraph 13 enabled the Reserve Bank to exempt any company or class of companies from all or any of the provisions of the directions either generally or for a specified period if it considered neces sary for avoiding any hardship or for any other just and sufficient reason
The Reserve Bank of India issued a circular letter bringing the directions to the notice of companies like Peerless
On September 14 1973 the Peerless Company ad dressed a letter to the Reserve Bank of India explaining the nature of their business and claiming that their business was outside the scope of the directions issued by the Re serve Bank
Most important of all it was requested that if it was thought that their business attracted the notifica tion they should be granted exemption from the applicabili ty of the notification as provided by paragraph 13
It was pointed out that their business was of a special type that it was carried on scientific lines and actuarial principles and that the applicability of the notification would injuri ously affect two hundred thousands of subscribers that 20000 persons would lose employment and that the potential for future employment would be destroyed
It was further pointed out that over 90 of the concerned Public Fund was invested in Government securities and in Nationalised Banks
The Balance sheet of the company its brochure and a copy of its advertisement were enclosed
The Reserve Bank of India by their order dated December 3 1973 exempted the company from the provisions of paragraph 4 of the notification in so far as those provisions restricted the acceptance of sub scriptions under the schemes upto 25 of the paid up capital and free reserve fund
Certain conditions were however imposed
The company was directed to transfer every year to the reserve fund a sum not less than 50 of the profit after taxes
The company was directed not to declare any 26 dividend at rates higher than 6 and 7 on ordinary and preferential shares till the free reserve became equal to the paid capital
The company was also required to maintain not less than 75 of its total assets in the form of invest ments and Government Trustee securities etc
The Company was directed to submit every year a certificate from their Auditors in regard to compliance with the conditions im posed
The exemption was to be reviewed every two years
It appears that there was an inspection in 1974 but we have no information about the findings in the course of the inspec tion
Evidently nothing objectionable was found
This is apparent from the affidavit filed on behalf of the Reserve Bank of India in the Calcutta High Court in Civil Rule No 5941W77 a writ petition filed by Favourite Investment Company challenging the refusal of the Reserve Bank to grant them exemption from the Miscellaneous Non Banking Companies Directions 1973 and complaining of discrimination in that such an exemption had been granted to Peerless
Comparing the schemes of the two companies it was pointed out in the affidavit that the Endowment Certificates issued by Peerless Company were for periods ranging from ten to thirty years while the Endowment Certificates granted by Favourite Compa ny ranged from five to thirty years
It was stated that the schemes of the Favourite Company which ranged for short periods from five to thirty years were unscientific in as much as interest payable by the company on short term cer tificates was higher than 10 of the instalments or sub scriptions collected by the company which were invested in Government securities and Banks where field was between five to ten percent
It was noticed that Peerless maintained a fund based on actuarial principles to which the subscrip tions received from each subscriber from the second year onwards were credited along with compound interest at 8 per annum
It was also noticed that cash and Bank balances in the current account of Peerless and investment in other Government securities on short term and fixed deposits were adequate to meet the contractual obligations of Peerless to its subscribers
It was noticed that while the paid up capital and reserves of Peerless amounted at that time to Rs233 lakhs and its investment in Government securities and fixed deposits amounted to Rs10538 lakhs its deposit liabilities amounted to Rs 11476 lakhs
This position was considered satisfactory by the Reserve Bank
It was finally stated having regard to the satisfactory financial position of the Peerless and the fact that it was a well established one and having regard to the certificate furnished by the actuarial consultant of the Peerless supported by data
It was granted exemption from the provisions of paragraph 4 of the 1973 Directions subject to its compliance with the following conditions After setting out the conditions it was stated that Peerless 27 had been complying with the conditions and that its finan cial position continued to be satisfactory
We should men tion here that whatever vices there may be in the Peerless Scheme and the business methods of Peerless the financial position of Peerless on the basis of the criteria mentioned in the affidavit of the Reserve Bank in the Favourire Bank is far sounder now than then
In 1974 a Study Group headed by Dr J S
Raj was appointed by the Reserve Bank to examine the existing statu tory provisions with a view to assessing their adequacy in regulating the conduct of business by non banking companies in the context of the monetary and credit policy laid down by the Reserve Bank of India from time to time and to sug gest measures for further tightening up the provisions so as to ensure that the activities of such companies in so far as they pertained to the acceptance of deposits invest ments lending operations etc
subserved the national interest and served more effectively as adjuncts to the regulations of the monetary and credit policies of the country besides affording a degree of protection to the depositors  monies
The Study Group went into the matter in some depth
Chapter VI of their report was devoted to Mis cellaneous Non Banking Companies covered by the Miscellane ous Non Banking Companies Reserve Bank Directions 1973
In paragraph 61 of the report the Study Group identi fied two types of Miscellaneous Non Banking Companies cov ered by the Miscellaneous Non Banking Companies Reserve Bank Directions as a those conducting prize chits benefitsavings schemes lucky draws etc the modus operandi of the types of schemes con ducted by these companies has been set out in a subsequent paragraph Paragraph 63 extract ed below and b those conducting conventional or customary chit funds whereunder the foreman companies enter into agreements with a specified number of subscribers that every one of them shall subscribe a certain sum in instalments over a definite period and that every one of such subscriber shall in his turn as determined by lot or by auction or by tender or in such other manner as may be provided for in the agreements be entitled to the prize amount
This prize amount is arrived at by deduction from out of the total amount subscribed at each instalment by all subscribers i 28 the commission charged by the company or service charges as a promoter or a foreman or an agent and ii discount ie any sum which a subscriber agrees to forego from out of the total subscriptions of each instalment in consideration of the balance being paid to him
 The business of the Miscellaneous Non Banking Companies conducting prize chits benefitsavings schemes or lucky draws etc was described in paragraph 63 of the report as follows 63 Companies conducting the above types of schemes are comparatively of a recent origin and of late there has been a mushroom growth of such companies which are doing brisk busi ness in several parts of the country espe cially in big cities like Ahmedabad Banga lore Bombay Calcutta and Delhi
They have also established branches in various States
These companies float schemes for collecting money from the public and the modus operandi of such schemes is generally as described below The company acts as the foreman or promoter and collects subscriptions in one lump sum or by monthly instalments spread over a specified period from the subscribers to the schemes
Periodically the numbers allotted to members holding the tickets or units are put to a draw and the number holding the lucky ticket gets the price either in cash or in the form of an article of utility such as a motor car scooter etc
Once a person gets the prize he is very often not required to pay further instalments and his name is deleted from further draws
The schemes usually pro vide for the return of subscriptions paid by the members with or without an additional sum by way of bonus or premium at the end of the stipulated period in case they do not get any prize
The principal items of income of these companies are interest earned on loans given to the subscribers against the security of the subscriptions paid or on an unsecured basis as also loans to other parties service charges and membership fees collected from the sub scribers at the time of admission to the membership of the schemes
The major heads of expenditure are prizes given in accordance with the rules and regulations of the schemes advertisements and publicity expenses and remuneration and other perquisites to the directions
 29 The Committee observed in the report that the Directions known as the Misellaneous Non Banking Companies Reserve Bank of India Directions
1973 were applicable to companies conducting what were commonly known as prize chit schemesbenefit or savings schemes or lucky draws and also to those conducting conventional type of chits or those conducting any other form of chitskuris
What is of impor tance and what requires to be noted here is that the Study Group which had investigated the business of various types of Non Banking Companies was of the view and their view must be taken to have been expressed with reference to those who were well acquainted with the nature of business of Non Banking Companies and those who were incharge of the enforcement of the 1973 Directions that the 1973 Directions covered companies conducting prize chit schemesbenefit or saving schemes or lucky draws as well as companies conduct ing conventional type of chits and other kinds of chitskuris
Simple recurring deposit schemes do not appear to have been in the contemplation of either the Datta Study Group or the Raj Committee nor were such schemes considered at that stage as covered by the 1973 Directions
The conclusion of the Study Group was stated in para graph 6 11 as follows From the foregoing discussion it would be obvious that prize chits or benefit schemes benefit primarily the promoters and do not serve any social purpose
On the contrary they are prejudicial to the public interest and also adversely affect the efficacy of fiscal and monetary policy
There has also been a public clamour for banning of such schemes this stems largely from the malprac tices indulged in by the promoters and also the possible exploitation of such schemes by unscrupulous elements to their own advantage
We are therefore of the view that the con duct of prize chits or benefit schemes by whatever name called should be totally banned in the larger interests of the public and that suitable legislative measures should be taken for the purpose if the provisions of the existing enactments are considered inadequate
Companies conducting prize chits benefits schemes etc may be allowed a period of three years which may be extended by one more year to wind up their business in respect of such schemes andor switch over to any other type of business permissible under the law 30 Finally in paragraph 621 the study Group made its recommendation for a total ban on the conduct of prize chits
If paragraph 621 is read along with paragraph 63 of the Report we must take it that the recommendation of the Committee was that prize chits of the kind described by them in paragraph 63 should be banned respective of the name under which they were conducted
Simple Recurring Deposit Schemes were not contemplated
Thereafter as a follow up of the recommendations of the Raj Committee in 1977 two sets of directions were issued by the Reserve Bank called the Miscellaneous Non Banking Companies Reserve Bank Directions 1977 and the Non Bank ing Financial Companies Reserve Bank Directions 1977
Paragraph 2 of Miscellaneous NonBanking Companies Reserve Bank Directions 1977 was more or less the same as para graph 2 of the 1973 directions
As in the 1973 directions so also in the 1977 directions a Miscellaneous Non Banking Company was defined to mean a company carrying on all or any of the types of business referred to in paragraph 2 of the directions
Paragraph 5 of the 1977 Miscellaneous Non Bank ing Companies Reserve Bank Directions which corresponded to paragraph 4 of the 1973 directions however made a radical departure from the earlier provision
For the first time a ceiling was fixed on the period for which deposits could be accepted
It was provided that the period of a deposit could not be more than six months
Paragraph 14 also vested in the Reserve Bank the power to grant exemption in suitable cases
The Non Banking Financial Companies Reserve Bank Directions 1977 were issued simultaneously with the Miscel laneous NonBanking Companies Reserve Bank Directions 1977 and Section 2f g h i j k 1 respectively defined the expressions hirepurchase finance company  housing finance company  insurance company  investment company  loan company  mutual benefit financial company  and non banking financial company  NonBanking Financial Company  was defined to mean any hirepurchase finance housing finance investment loan or mutual benefit finan cial company and an equipment leasing company but not to include an insurance company or stock exchange or stock broking company
 Paragraph 4 dealt with Acceptance of Deposits by mutual benefit financial companies
Paragraph 51 dealt with period of deposits for hire purchase fi nance loan and investment companies and provided that the period of deposits shall not be less than six months or more than thirty six months
Paragraph 19 made the directions applicable to a loan company also applicable to every compa ny which was a 31 financial institution  but not belonging to any of the categories of companies mentioned in paragraph 21 1 or which was not a miscellaneous non banking company within the meaning of the Miscellaneous Non Banking Companies Direc tions 1977 Financial Institution  is defined in the Act itself Reserve Bank of India Act by Sec
45 1 c Clauses v and vi which are relevant to the following effect Financial Institution  means any non banking institution which carries on as its business or part of its business any of the following activities namely v managing conducting or supervising as foreman agent or in any other capacity of chits or kuris as defined in any law which is for the time being in force in any State or any business which is similar thereto vi collecting for any purpose or under any scheme or arrangement by whatever name called monies in lumpsum or Otherwise by way of subscriptions or by sale of units or other instruments or in any other manner and awarding prizes or gifts whether in cash or kind or disbursing monies in any other way to persons from whom monies are collected or to any other person
 It was suggested by the learned Counsel for the Reserve Bank that whether Peerless Company was a miscellaneous Non Bank ing Company within the meaning of the expression as defined in the Miscellaneous Non Banking Companies Reserve Bank Directions 1973 or a financial institution  which was not such a miscellaneous banking company undoubtedly there was a ceiling or the maximum period for which the company could accept deposits and that was thirty six months
We will refer to the argument in due course
Thereafter in 1978 the was enacted to ban the promotion or conduct of prize chits and money circulation schemes and for matters connected therewith or incidental thereto
Section 2a defines Con 32 ventional Chits  on practically the same lines as the type of business covered by the second part of paragraph 2 of the Miscellaneous NonBanking Companies Reserve Bank Directions 1973 and the Miscellaneous Non Banking Companies Reserve Bank Directions 1977
Section 2c defines Money Circula tion Scheme  and is as follows 2c money circulation scheme means any scheme by whatever name called for the making of quick or easy money or for the receipt of any money or valuable thing as the consideration for a promise to pay money on any event or contingency relative or applica ble to the enrolment of members into the scheme whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions  Section 2e defines prize chit  and is as follows 2e prize chit  includes any transaction or arrangement by whatever name called under which a person collects whether as a promoter foreman agent or in any other capacity monies in one lumpsum or in instalments by way of contributions or subscriptions or by sale of units certificates or other instruments or in any other manner or as membership fees or admission fees or service charges to or in respect of any savings mutual benefit thrift or any other scheme or arrangement by whatever name called and utilises the monies so collected or any part thereof or the income accruing from investment or other use of such monies for all or any of the following pur poses namely i giving or awarding periodically or other wise to a specified number of subscribers as determined by lot draw or in any other man ner prizes or gifts in cash or in kind whether or not the recipient of the prize or gift is under a liability to make any further payment in respect of such scheme or arrange ment ii refunding to the subscribers or such of them as have not won any prize or gift the whole or part of the subscriptions contribu tions or other monies collected with or without any bonus premium interest or other advantage by whatever name called on the termination of the scheme or arrangement or on or after the expiry of the period 33 stipulated therein but does not include a conventional chit The primary question in the present case is whether the Endowment Scheme piloted by the Company falls within the definition of prize chit Section 3 bans prize chit and money circulation schemes and is in the following terms No person shall promote or conduct any prize chit or money circulation scheme or enrol as a member to any such chit or scheme or par ticipate in it otherwise or receive or remit any money in pursuance of such chit or scheme   It is important to notice here that the ban is not merely on promoting or conducting any prize chit or money circulation scheme but also on participation in the scheme
Section 4 makes a contravention of the provisions of Section 3 punish able with imprisonment for a term which may extend to three years or with fine which may extend to five thousand rupees or with both
Section 5 makes printing publishing of any ticket coupon or other document for use in the prize chit or money circulation scheme with a view to promotion of such scheme in contravention of the Act punishable with imprison ment etc
So also the printing publication or distribution of any advertisement of the prize chit or money circulation scheme
The use of any premises for purposes connected with the promotion or conduct of the scheme is also punishable
Section 6 deals with offences by companies
Section 7 deals with the powers of entry search and seizure
Section 8 provides for the forfeiture of newspapers or other publica tions containing any material connected with any prize chit or money circulation scheme
Section 11 exempts from the operation of the Act prize chits or money circulation schemes promoted by a State Government or any officer or authority on its behalf a company wholly owned by a State Government which does not carry on any business other than the conducting of a prize chit or money circulation scheme a banking institution notified by the Central Government under Section 51 of the Banking Regulation Act the State Bank of India or a subsidiary bank of the State Bank of India or a corresponding new bank Regional Rural Bank a co operative bank and any charitable or educational institu tion notified in that behalf by the State Government in consultation with the Reserve Bank of India
There is no general provision which empowers the Central Government or the Reserve Bank of India to exempt any other prize chit or money circulation scheme from the 34 applicability of the Act
Section 12 contains transitional provisions relating to the winding up of the business relat ing to a prize chit or money circulation scheme which is being conducted at the commencement of the Act
The person conducting the prize chit or money circulation scheme is required to furnish to the State Government or the autho rised officer and to the Reserve Bank in the prescribed form full information regarding the chit or scheme along with a winding up plan prepared in accordance with the provisions of rules made by the State Government
The State Government in consultation with the Reserve Bank is invested with the power to permit such person to continue to conduct the business relating to the chit or scheme for such further period as may be necessary in the circumstances of the case and in the interests of the members of the chit or the scheme
The State Government in consultation with the Re serve Bank may approve the winding up plan furnished by the person conducting the scheme with or without modifications or reject the same
Section 13 empowers the State Government to make rules for the purpose of carrying out the provisions of the Act
The Government of West Bengal has made the Prize Chits and Money Circulation Schemes Banning West Bengal Rules 1979 in exercise of its powers under Section 13 of the Act
The Miscellaneous Non Banking Companies Reserve Bank Directions 1977 and the Non Banking Financial Companies Reserve Bank Directions came into force on July 1 1977
On March 3 1978 the Reserve Bank informed the Peerless Company that under the Miscellaneous Non Banking Companies Directions which applied to the Company the Company was prohibited from accepting deposits for more than 36 months and since the deposits accepted by the Company were for periods exceeding 36 months the Reserve Bank wanted to know what action the Company proposed to take to comply with the requirement stipulating the maximum period for which depos its might be accepted
In reply the Company by its letter dated 31st March 1978 pointed out the special features of the Company which persuade the Reserve Bank to grant exemp tion to the Company from the 1973 directions
The Company invited the attention of the Reserve Bank to the various elements of the scheme which made it impracticable to comply with the stipulation regarding the maximum period of 36 months as that would make the scheme wholly unviable
The Company requested that further exemption may be granted in the public interest
The alternative it was said would be to close the business and that would mean loss of employment to several thousands of employees and financial loss to millions of depositors
The Company suggested that the Reserve Bank might recommend to the Central 35 Government to convert the undertaking into a joint sector enterprise
The letter ended with an appeal to the Reserve Bank to grant exemption from the restrictions relating to maximum period
It is not clear what precisely took place subsequently but there was an inspection of the Peerless Company s books by an inspection team appointed by the Reserve Bank of India
The team in its report pointed out various unhealthy features of the schemes managed by the Peerless Company
The principal unhealthy features pointed were a the emphasis of the Company was on attracting fresh business rather than collect ing renewal subscriptions b the agency structure and the rates of commission were conceived in the interest of the agents and not the depositors c the owned funds  of the Company were low and did not keep pace with the rapid expansion of its outside liabilities d the Company followed the curious procedure of crediting the entire amount of first year s subscriptions to its profit and loss account treating it as income
This peculiar accounting procedure resulted in the profit and loss account published by the Company not representing a true picture of the real profits of the Company e certificates were treated as lapsed if any subscription was hot paid in the first three years f the savings scheme of the Company was basically in the nature of recurring deposits schemes of Commercial Banks and National Savings Organisations but the yield was very much lower g all sorts of efforts were made by the Company to capture public imagination
 Thereafter on July 23 1979 the Reserve Bank of India pur ported to send a reply to the Company s letter dated March 31 1978 to which we have made a reference above
By this letter the Reserve Bank pointed out to the Company that the schemes conducted by the Company were 36 covered by the provisions of the which had come into force with effect from December 12 1978
As the Company was banned from doing fresh business and was required to wind up its existing business under the Act there was no question of granting any exemption to the company
Nevertheless the Reserve Bank stated that they had considered the claim for exemption on merits and found that it was necessary to cancel the exemption already granted
The reasons for the proposed cancellation were set out and the Company was asked to show cause why the exemption should not be cancelled
On August 30 1979 the Company replied at great length stating how necessary it was in the public interest to grant exemp tion to the Company
Exemption was however refused by the Reserve Bank on March 19 1980
On August 10 1979 the Government of West Bengal addressed a communication to the Peerless Company pointed out that the Prize ChitsMoney Circulation Schemes conducted by the Company came within the purview of the Prize Chits and Money Circulation Schemes Banning Act 1978 and therefore the Company was under an obligation to submit a winding up plan under Rule 4 of the Prize Chits and Money Circulation Schemes Banning West Bengal Rules 1979
In the meanwhile on September 3 1979 the Company filed a writ petition in the Calcutta High Court for a declaration that the did not apply to the business carried on by the company
A Rule was issued and an Interim Order was made in favour of the company first for a limited period and later till the disposal of the writ petition
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 Rule and Interim Order were issued
A learned single Judge of the High Court dismissed both the writ petitions but appeals preferred by the company under the Letters Patent against the judgment of the learned single Judge were allowed by a Division Bench of the Calcut ta High Court
It was declared that the business carried on by the company did not come within the mischief of the 
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 have preferred Civil Appeal Nos
3562 3563 3564 3565 and 4459 of 1986
In the course of the judgment the Division Bench of the Calcutta High Court had observed that the company was a financial institution within the meaning of paragraph 11 of the Non Banking Finan cial Companies Reserve Bank directions 1977 and there fore 37 the Directions contained therein applied to the business carried on by the company
Against this observation of the Division Bench the Company has also preferred Civil Appeal Nos 3566 and 3557 of 1986
We may also mention here that after the judgment of the Division Bench of the Calcutta High Court the Company pursuant to the observation of the Division Bench that it was a financial institution within the meaning of paragraph 11 of the Non Banking Financial Companies Directions applied afresh to the Reserve Bank of India for exemption from complying with the Directions
The Reserve Bank of India by its order dated August 22 1986 refused to grant the exemption sought
It appears that the Company has filed another writ petition in the Calcutta High Court against the refusal of the Reserve Bank of India to grant exemption
In view of the pendency of the writ peti tion in the Calcutta High Court we do not desire to say anything on the merits of the claim of the Company for exemption or on the question whether the Company is a finan cial institution within the meaning of paragraph 11 of the Non Banking Financial Companies Reserve Bank Directions
We leave that question open as we consider that the appeals preferred by the Reserve Bank of India the Union of India and the State of West Bengal may be decided without express ing any opinion on the question
Appeals preferred by the Company are disposed of with these observations
The question for our consideration is Is the Endowment Scheme of the Peerless Company a prize chit within the meaning of Section 2e of the Prize Chits and Money Circu lation Schemes Banning Act The particulars of the scheme are not in dispute
What is its nature It is not a gambling scheme
It is not a lottery scheme
There are no prizes no gifts no elements of chance
It is just a plain Recurring Deposit Scheme such as the many schemes floated by Commer cial Banks and National Savings Organisation
This is admit ted in the Inspection Report of the Reserve Bank of India
But says the Counsel for the Reserve Bank if money is received in a lumpsum or in instalments and money is uti lised either for payment of prizes or for refund of the whole or part of the amount of subscription the scheme is a prize chit as defined
Prize or gift is not an essential element and refund of the amount of subscription is suffi cient to bring it within the mischief of s2e
He says clauses i and ii of the definition are disjunctive
He emphasises the words for all or any of the following pur poses
And he stresses the fact that the definition is an inclusive  one
He says that if Commercial Banks the National Savings Organisation and others are permitted to receive deposits And to run Recurring Deposit Schemes they do so under special statutes
38 The learned Attorney General and the learned Counsel for the Reserve Bank of India urge that the Act is aimed at protect ing the interests of depositors generally and that the millions of depositors of Peerless need such protection sorely
On the other hand the learned Counsel for Peerless would say that the history of the legislation and the mis chief which the legislation seeks to prevent plainly indi cate that the legislation is aimed at schemes involving the giving away of prizes or gifts and that the inclusive  definition is merely intended to take in all schemes or arrangements whether called prize chits or by whatever other name
It is said that Parliament could never have intended to strike at all Recurring Deposit Schemes partic ularly when the Life Insurance Corporation of India the Commercial Banks and National Savings Organisation offer such schemes
The Learned Counsel urges that Parliament could never have contemplated the closure of a pioneering business such as Peerless which has tapped hitherto untapped savings resources of the country
If there are any vicious features of the business Peerless he says is ready to remove the vices and cure the defects
He says for example the forfeiture clause has now been deleted from the scheme and this is more than what the Life Insurance Corporation a monolithic monopolistic Public Sector Corporation has done
He even hints that the company may be nationalised and the Company would raise no protest
According to him the closure of the business of the company will result in throwing out of employment tons of thousands of employees and putting in jeopardy the small savings of millions of little Depositors
We must add here that both sides talked of the public inter est and shed copious tears for the unfortunate depositors  but neither side appeared to have any ready plan or even a contingent plan to protect or benefit the depositors
On the one hand there is a demand for the retributive pound of flesh unmindful of the future of thousands of employees and the fate of the small savings of millions of depositors all in the name of the interest of the depositors
On the other having bled the depositors white there is now a glib and make believe offer of submission to strict regulation or even nationalisation for the protection it seems of em ployees and depositors
In the ultimate analysis the question turns on the interpretation of the definition of Prize Chit  in s2e of the 
On this we are not without guidance
We have it in Srinivasa Enterprise vs Union of India  The very provision was considered and construed there by a bench of three Judges of the Court which included one of us
The 39 Court fortunately speaking through Krishna Iyer J after extracting s2e observed The quint essential aspects of a prize chit are that the organizer collects moneys in lumpsum or instalments pursuant to a scheme or arrangement and he utilises such moneys as he fancies primarily for his private appetite and for 1 awarding periodically or otherwise to a specified number of subscribers prizes in cash or kind and 2 refunding to the subscribers the whole or part of the money collected on the termination of the scheme or otherwise
The apparent tenor may not fully bring out the exploitative import lurking beneath the surface of the words which de scribe the scheme
Small sums are collected from vast numbers of persons ordinarily of slender means in urban and rural areas
They are reduced to believe by the blare of glit tering publicity and the dangling of astronom ical amounts they stand a chance in practice neligible of getting a huge fortune by making petty periodical payments
The indigent agres tics and the proletarian urbanites pressured by dire poverty had opted by the hazy hope of a lucky draw subscribe to the scheme although they can iii afford to spare any money
This is not promotion of thrift or wholesome small savings because the poor who pay are bound to continue to pay for a whole period of a few years over peril of losing what has been paid and the end of it the fragile prospects of their getting prizes are next to nil and even the hard earned money which they have invested hardly carries any interest
They are eligible to get back the money they have paid in drib lets virtually without interest the expres sion bonus  in s2a being an euphemism for a nominal sum
What is more the repayable amount being small and the subscribers being scattered all over the country they find it difficult even to recover the money by expensive d ilatory litigative process
Since there are a large number of prize chits all over the country which have almost become a Pan Indian opidemic and since the total number of people victimised by these projects are considerable the injury to the community is substantial so that a welfare state dedicated to the Directive Principles of has to awake and protect the vulnerable sector
Another weighty factor which 40 has alerted the state into action is that the flood of funds flowing through prize chits benefit the organisers of such schemes who have no social responsibility for national productivity and in their hands is easy money with little developmental benefits or attractive returns for the poor investors
The noxious net cast by the prize chit promoters was large and the State moved to stop this menace
Many a little makes a mickle and those small sums collected from a substantial number of subscribers accumulated into huge resources which otherwise would ordinarily have been avail able for national development
The grim picture of the luckless may who were losing their money appetized by gambling prospects and the sterlisation of people s re sources which were siphoned off by private adventurists through prize chits to the detriment of national development ignited the impugned legislation
 The Court identified the vice sought to be prevented by the Banning Act as the glitter of glamorous prizes the lure of big money for small
What it sought to prevent was the exploitation of the ignorant poor by the glare of publicity of fabulous prizes
The Court found that it was this mis chief that was remedied by the Act
According to Srinivasa the giving away or awarding prizes or gifts to a specified number of subscribers is an essential element of a Prize Chit as also refunding to the subscribers the whole or part of the amount of subscription
The Court then referred to the report of the Raj Study Group to emphasise in the words of Krishna Iyer J the trauma inflicted by lucky draw schemes on the host of luckless illiterates succumbing to the prize mana 
Dealing with alternate proposals to save prize chits the Court said In many situations the poor and unwary have to be saved from the seducing processes resorted by unscrupulous racke teers who glamourize and prey upon the gambling instinct to get rich quick through prizes
So long as there is the resistless spell of a chance though small of securing a prize though on paper people chase the prospect by sub scribing to the speculative scheme only to lose what they had
Can you save moths from the fire except by putting out the fatal glow 41 Distinguishing the Prize Chit from the Conventional Chit it was said Once the prize facet of the chit scheme is given up it becomes substantially a conventional chit  and the ban of the law ceases to operate
 Quoting from the Raj Committee they said Conventional Chits and Prize Chits are different categories with different financial features and different damaging effects Again the Court while pointing out that in its pith and substance the legislation was not aimed at banning lotteries which the State legislature had jurisdiction to do but was aimed at banning a special specie of contracts with sinister feature  while the Parlia ment was competent to do further observed So viewed it is easy to accept the submission of the Union of India that Parliament wanted to restrict and prohibit certain types of contracts because of the noxtious element of gambling and lottery implicit therein and apt to entice the credulous and uncautious So the Court was of the view that the was designed to fight the baser human instinct of gambling aroused by the prize element involved in the banned transactions The Court concluded that it was the prize element that brought it within the mischief of the Act and that without the prize element it would be no different from a Conventional Chit considered harmless by the Parliament
We must notice here that in a Conventional Chit  as defined in the Act though every subscriber is entitled to the prize amount some get it sooner than the others depending on the result of the auction or the draw and to the extent and it depends on a draw there is a slight element of chance
In the Recurring Deposit Schemes such as the ones we are concerned with even that element of chance is lacking
If Conventional Chits  are not banned it is a legitimate question to ask whether Parliament could have contemplated the banning of schemes not involving the element of the kind of harm intended to be prevented even to the slight degree as in Conventional Chits Much argument was advanced on the significance of the word includes  and what an inclusive definition implies
Both sides relied on Dilworth s case
Both sides read out the well known passage in that case where it was stated The word include is very generally used in interpreta  tion clauses in order to enlarge the meaning of words or phrases occurring in the body of the statute and when it is so used these words or phrases must be construed as com 42 prehending not only such things as they signify according to their natural import but also those things which the interpretation clause declares that they shall include
But the word include is susceptible of another construction which may become imperative if the context of the Act is sufficient to show that it was not merely employed for the purpose of adding to the natural significance of the words or expressions defined
It may be equivalent to mean and include and in that case it may afford an exhaustive explanation of the meaning which for the purposes of the Act must invariably be attached to these words or expres sions
 Our attention was also invited to Ardeshir Bhiwandiwala vs State of Bombay  CIT Andhra Pradesh vs Taj Mahal Hotel and section K Guptav
KP Jain We do not think it necessary to launch into a discussion of either Dilworth s case or any of the other cases cited
All that is necessary for us to say is this Legislatures resort to inclusive definitions 1 to enlarge the meaning of words or phrases so as to take in the ordinary popular and natural sense of the words and also the sense which the statute wishes to attribute to it 2 to include meanings about which there might be some dispute or 3 to bring under one nomenclature all transactions possessing certain similar features but going under different names
Depending on the context in the process of enlarging the definition may even become exhaustive
We do not think that by using the word includes  in the definition in s2a of the Act the Parliament intended to so expand the meaning of prize chit as to take in every scheme involving subscribing and refunding of money
The word includes  the context shows was intended not to expand the meaning of prize chit  but to cover all transactions or arrangements of the nature of prize chits but under different names
The expression Prize Chit  had nowhere been statutorily defined before
The Bhahatosh Datta Study Group and the Raj Study Group had identified the schemes popularly called Prize Chits 
The Study Groups also recognised that Prize Chits  were also variously called benefitsavings schemes and lucky draws and that the basic common features of the schemes were the giving of a prize and the ultimate refund of the amount of subscriptions Vide Para 63 of the report of the Raj Study Group
It was recommended that prize chit and the like by whatever name called should be banned
Since prize chits were called differently prize chits  benefitsavings schemes  lucky draws  etc
it 43 became necessary for the Parliament to resort to an inclu sive definitions so as to bring in all transactions or arrangements containing these two elements
We do not think that in defining the expression Prize Chit  the Parliament intended to depart from the meaning which the expression had come to acquire in the world of finance the meaning which the Datta and the Raj Study Groups had given it
That this is the only permissible interpretation will also be further evident from the text Chit and the context as we shall presently see
Interpretation must depend on the text and the context
They are the bases of interpretation
One may well say if the text is the texture context is what gives the colour
Neither can be ignored
Both are important
That interpreta tion is best which makes the textual interpretation match the contextual
A statute is best interpreted when we know why it was enacted
With this knowledge the statute must be read first as a whole and then section by section clause by clause phrase by phrase and word by word
If a statute is looked at in the context of its enactment with the glasses of the statutemaker provided by such context its scheme the sections clauses phrases and words may take colour and appear different than when the statute is looked at without the glasses provided by the context
With these glasses we must look at the Act as a whole and discover what each section each clause each phrase and each word is meant and designed to say as to fit into the scheme of the entire Act
No part of a statute and no word of a statute can be construed in isolation
Statutes have to be construed so that every word has a place and everything is in its place
It is by looking at the definition as a whole in the setting of the entire Act and by reference to what preceded the enactment and the reasons for it that the Court con strued the expression Prize Chit  in Srinivasa and we find no reason to depart from the Court s construction
We have already referred to the Bhabatosh and Raj Study Groups  Reports and recommendations
In para 63 of the latter report the two common and basic features of prize chits by whatever name known were identified as the giving of prizes to the lucky ones and the refunding of subscrip tion to every one
These prize chits by whatever name known were recommended to be banned
It was this recommendation that was accepted by the Parliament in enacting the 
If this much is borne in mind it becomes evident that the two re quirements mentioned in the two clauses i and ii of the definition are not to be read disjunctively they are two distinct attributes of Prize Chits  each of which 44 has to be satisfied
It is important to notice here that the Conventional Chit satisfies both the requirements of the definition of Prize Chit  since as we have already point ed out it involves both the certain  and the chance  elements the certain element being the refund of the amount of subscriptions less the deductions and the chance element being the time of such payment dependent on the result of the draw or auction
Yet the definition of Prize Chit  expressly excludes the Conventional Chit obviously for the reason that the chance  element is overshadowed by the certain  element
If so why should any construction be placed on the definition so as to bring in all Recurring Deposit Schemes even if they do not involve a chance ele ment Such a construction would reduce the definition to a near absurdity and render the reference to the giving or awarding of a prize or gift a meaningless superfluity
If a conventional chit is not a prize chit  by definition there appears to be no logic in construing the definition to include a Recurring Deposit Scheme
The argument is that the two clauses i and ii are to be read disjunctively and that they should not be read as if they are joined by the conjunction and 
We do not agree
There is no need to introduce the word or  either
How clauses i and ii of s2e have to be read depends on the context
The context requires the definition to be read as if both clauses have to be satisfied
There is nothing in the text which makes it imperative that it be read otherwise
The learned counsel urges that the expression all or any of the following purposes indicates that the purpose may be either the one mentioned in i or the one mentioned in ii
We do not agree with this submission
Each of the clauses i and ii contains a number of alternatives and it is to those several alternatives that the expression all or any of the follow ing purposes refers and not to i or ii which are not alternatives at all
In fact a prize chit by whatever name it may be called does not contemplate the exhaustion of the entire fund by the giving of prizes it invariably provides for a refund of the amount of subscription less the deduc tions to all the subscribers or to those who have not won prizes depending on the nature of the scheme
Clauses i and ii refer to the twin attributes of a prize chit or like scheme and not to two alternate attributes
Our construction of s2e is further reinforced by a reference to the other provisions of the Act
Section 3 prescribes No person shall promote or conduct any prize chit or money circulation scheme or enrol as a member to any such chit or scheme or participate in it otherwise or receive or remit any money in pursuance of such chit or scheme
 Section 4 makes a contravention of s3 punishable with imprisonment extending to three years or fine extending to five thousand 45 rupees subject to a minimum sentence of one year s imprison ment and fine of one thousand rupees
It is clear that even a subscriber is guilty of an offence punishable with an obligatory minimum sentence
While it is possible to say that Parliament desired to root out prize chits and schemes of like nature involving the vicious element of gambling it is inconceivable that Parliament intended to visit even subscribers to Recurring Deposit Schemes involving no such vice with such dire consequence
Section 5 makes printing publishing of any ticket coupon or other document for use in the Prize Chit or Money Circulation Scheme with a view to promotion of such scheme in contravention of the Act the printing publication or distribution of any advertisement of the Prize Chit or Money Circulation Scheme the use of any premises for purposes connected with the promotion or conduct of the scheme etc
punishable with imprisonment extending to two years or fine extending to three thousand rupees subject to a minimum sentence of one year s imprison ment and fine of one thousand rupees
Section 8 provides for forfeiture of newspapers or other publications connected with any Prize Chit or Money Circulation Schemes
Surely these provisions are far too draconian to be applied to schemes which are but Recurring Deposit Schemes
However we look at it we arrive at the conclusion that s2e does not contemplate a scheme without a prize and therefore the Endowment Certificate Scheme of the Peerless Company is outside the 
The conclusion appears to us to be irresistable
The appeals filed by the Reserve Bank of India the Union of India and the State of West Bangal are accordingly dismissed
It is open to them to take such steps as are open to them in law to regulate schemes such as those run by the Peerless Company to prevent exploitation of ignorant subscribers
Care must also be taken to protect the thousands of employees
We must also record our dissatisfac tion with some of the schemes of the Life Insurance Corpora tion which appear to us to be even less advantageous to the subscribers than the Peerless Scheme
We suggest that there should be a complete ban on forfeiture clauses in all sav ings schemes including Life Insurance Policies since these clauses hit hardest the classes of people who need security and protection most
We have explained this earlier and we do wonder whether the weaker sections of the people are not being made to pay the more affluent sections Robbing Peter to pay Paul We would also like to query what action the Reserve Bank of India and the Union of India are taking or proposing to take against 46 the mushroom growth of finance and investment companies  offering staggeringly high rates of interest to depositors leading us to suspect whether these companies are not specu lative ventures floated to attract unwary and credulous investors and capture their savings
One has only to look at the morning s newspaper to be greeted by advertisements inviting deposits and offering interest at astronomic rates
On January 1 1987 one of the national newspapers published from Hyderabad where one of us happened to be spending the vacation carried as many as ten advertisements with banner head lines  covering the whole of the last page a quarter of the first page and conspicuous spaces in other pages offering fabulous rates of interest
At least two of the adverisers offered to double the deposit in 30 months 2000 for 1000 10000 for 5000 they said
Another advertiser offered interest ranging between 30 to 38 for periods ranging between six months to five years
Almost all the advertisers offered extra interest ranging between 3 to 6 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 companies which are accepting deposits promising most unlikely returns 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 businesses 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 whatsoever
Action appears imperative
SR Appeals dismissed


Summary:
The Peerless General Insurance and Investment Co Ltd was incorporated in 1932
After the nationalisation of the business of life insurance the name of the company was changed to the Peerless General Finance and Investment Co Ltd For over a quarter of a century now the business of the company has been that of finance and investment
The company offers three schemes the principal of which is the Endowment Certificate Scheme
Under this scheme a subscrib er is required to pay a fixed annual subscription for a fixed number of years varying between the minimum of 10 years and the maximum of 30 years
On the expiry of the period the subscriber will be paid by the company a sum of money called the Endowment Sum which is the face value of the Certificate
The subscriber is also entitled to be paid a guaranteed fixed bonus
If any instalment that is any amount of annual subscription is not paid within the stipu lated period and period of grace the Certificate lapses unless it has acquired a surrender value
A Certificate acquires surrender value after the expiry of three years from the date of commencement of the subscription for two full years has 2 been paid
A Certificate which has not acquired surrender value lapses on non payment of instalments and the amounts paid become forfeit to the company
A lapsed certificate may however be revived at any time before the expiry date of maturity on payment of all dues together with interest at one paisa per rupee per month
There is also provision in the scheme for conversion of the Certificate into a paid up Certificate the paid up amount to be paid at the end of the period but without bonus
A person purchasing a Certificate automatically becomes entitled to a free accident insurance policy under a group insurance scheme
A noticeable feature of the scheme is the remarkably low yield to subscriber on his investment
Not only that the subscriber is always at the losing end
Despite the same the message of Peerless is made to penetrate the rural areas to tap the small savings of the poor ignorant villagers through a special structure of agents special agents suborganizers special organizers and so on chosen from amongst those noted for their social political or official connections
The agents  Commission was 30 now 35 of the first year s subscription and 5 only of subsequent years  subscription
The incentive of 30 of the collection of the subscription of the first year automatically operates as a disincentive for collecting subscriptions of subsequent years resulting in heavy default in payment and forfeiture of subscriptions earlier paid
The first subscription is literally shared between the company and its agents under the method of accountancy adopted by the company treating the entire amount as income and not liability of the compa ny
The company adopted the actuarial system of accountan cy followed by the Life Insurance Corporation though the company itself does not and cannot do insurance business
However the company has now deleted the forfeiture clause and everyone is entitled to payment after the maturity period of the certificate
Section 45K of the Reserve Bank of India Act empowers the Reserve Bank to collect information from Non Banking Institutions as to deposits and to give directions in the public interest in particular 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
 Section 45L empowers the Reserve Bank to call for information from financial institutions and to give directions in particular directions relating to the conduct of business by them etc
Taking advantage of the 1970 Report of the Banking Commis sion s Study Group headed by Dr Bhabatosh Dutta on the role of various non banking financial institutions the Reserve Bank purporting to exercise its powers under Sections 45L and 45K of 3 the Reserve Bank of India Act gave certain directions called Miscellaneous Non Banking Companies Reserve Bank Direc tions 1973
Para 4a prescribed six months as the minimum period for which a Miscellaneous Non Banking Company could accept a deposit but no maximum period was prescribed
Paragraph 4bii prescribed a ceiling of 25 of the aggre gate of the paid up capital and free reserve of the company in the case of deposits accepted by Miscellaneous NonBanking Companies
Paragraph 13 enabled the Reserve Bank to exempt any company or class of companies from all or any of the provisions of the directions either generally or for a specified period if it considered necessary for avoiding any hardship or for any other just and sufficient reason
On September 14 1973 the Peerless Company addressed a letter to the Reserve Bank of India explaining the nature of their business and claiming that their business was outside the scope of the directions issued by the Reserve Bank while pointing out that their business was a special type that it was carried on scientific lines and actuarial prin ciples that over 90 of the concerned public fund was invested in Government securities and in nationalised Banks
The Reserve Bank of India by their order dated December 3 1973 exempted the company from the provisions of paragraph 4 of the notification in so far as those provisions restricted the acceptance of subscriptions under the scheme upto 25 of the paid up capital and free reserve fund
Certain condi tions were however imposed
The company was directed to transfer every year to the reserve fund a sum not less than 50 of the profit after taxes
The company was directed not to declare any dividend at rates higher than 6 and 7 on ordinary and preferential shares till the free reserve became equal to the paid up capital
The company was also required to maintain not less than 75 of its total assets in the form of investments and Government Trustee securi ties etc
The company was directed to submit every year a certificate from their Auditors in regard to compliance with the conditions imposed
The exemption was to be reviewed every two years
The said exemption was granted having regard to the satisfactory financial position of the Peer less and the fact that it was a well established one and having regard to the certificate furnished by the actuarial consultant of the Peerless supported by data
In the year 1974 there was yet another Study Group headed by Dr JS Raj appointed this time by the Reserve Bank
In para 621 the Study Group made its recommendations for a total ban on the conduct of prize chits of the kind described by them in paragraph 63
Simple Recurring Depos its Schemes were not contemplated
4 Thereafter as a follow up of the recommendations of the Raj Committee in 1977 two sets of directions were issued by the Reserve
Bank called the Miscellaneous Non Banking Companies Reserve Bank Directions 1977 and the Non Bank ing Financial Companies Reserve Bank Directions
Paragraph 5 of the Miscellaneous Non Banking Companies Reserve Bank Directions 1977 which corresponded to para graph 4 of the 1973 directions however made a radical departure from the earlier provision
For the first time a ceiling was fixed on the period for which deposits could be accepted
It was provided that the period of a deposit could not be more than thirty six months
Paragraph 14 also vasted in the Reserve Bank the power to grant exemption in suitable cases
Paragraph 51 of the Miscellaneous Non Banking Financial Companies Reserve Bank Directions 1977 dealt with period of deposits for hire purchase finance loan and investment companies and provided that the period of depos its shall not be less than six months or more than thirty six months
Paragraph 19 made the directions applicable to a loan company also applicable to every company which was a financial institution but not belonging to any of the categories of companies mentioned in paragraph 21 or which was not a miscellaneous non banking company within the meaning of the Miscellaneous Non Banking Companies Direc tions 1977
Thereafter in 1978 the Prize Chits and Money Circula tion Schemes Banning Act 1978 was enacted to ban the promotion or conduct of prize chits and money circulations schemes and for matters connected therewith or incidental thereto
Section 2a defines Conventional Chits on practically the same lines as the type of business covered by the second part of paragraph 2 of the Miscellaneous Non Banking Companies Reserve Bank Directions 1973 and the Miscellaneous Non Banking Companies Reserve Bank Direc tions 1977
Section 3 banned not merely promoting or conducting any prize chit or money circulation but also on participation in the Scheme of any kind contravention of which carried penal action
Section 11 exempts from the operation of the Act prize chits or money circulation schemes promoted by a State Government or any office or authority on its behalf a company wholly owned by a State Government which does not carry on any business other than the conducting of a prize chit or money circulation scheme a banking institution notified by the Central Government under Section 51 of the Banking Regulation Act the State Bank of India or a subsidiary bank of the State Bank of India or a corresponding new bank a Regional Rural Bank a co operative bank and any charitable or educational institu tion notified in that behalf by the State Government in consultation with the Reserve Bank of India
5 There is no general provision which empowers the Central Government or the Reserve Bank of India to exempt any other prize chit or money circulation scheme from the applicabili ty of the Act
In exercise of its powers under Section 13 of the Act the Government of West Bengal has made the Prize Chits and Money Circulation Scheme Banning West Bengal Rules 1979
The Miscellaneous Non Banking Companies Reserve Bank Directions 1977 and the Non Banking Financial Companies Reserve Bank Directions came into force on July 1 1977
On March 3 1978 the Reserve Bank informed the Peerless Company that under the Miscellaneous Non Banking Companies Directions which applied to the Company the Company was prohibited from accepting deposits for more than 36 months and since the deposits accepted by the Company were for periods exceeding 36 months the Reserve Bank wanted to know what action the Company proposed to take to comply with the requirement stipulating the maximum period for which depos its might be accepted
In reply the Company by its letter dated 31st March 1978 pointed out the special features of the Company which persuaded the Reserve Bank to grant exemp tion to the Company from the 1973 directions
The Company invited the attention of the Reserve Bank of the various elements of the scheme which made it impracticable to comply with the stipulation regarding the maximum period of 36 months as that would make the scheme wholly unviable
The Company requested that further exemption may be granted in the public interest
The alternative it was said would be to close the business and that would mean loss of employment to several thousands of employees and financial loss to millions of depositors
The Company suggested that the Reserve Bank might recommend to the Central Government to convert the undertaking into a joint sector enterprise
The letter ended with an appeal to the Reserve Bank to grant exemption from the restrictions relating to maximum period
By its letter dated July 23 1979 the Reserve Bank pointed out to the company that the schemes conducted by the Company were covered by the provisions of the which had come into force with effect from December 12 1978
As the Company was banned from doing fresh business and was required to wind up its existing business under the Act there was no question of granting any exemption to the company
Nevertheless the Reserve Bank stated that they had considered the claim for exemption on merits and found that it was necessary to cancel the exemption already granted
The reasons for the proposed cancellation were set out and the Company was asked to show cause why the exemption should not be cancelled
On August 30 1979 6 the Company replied at great length stating how necessary it was in the public interest to grant exemption to the Compa ny
On August 10 1979 the Government of West Bengal ad dressed a communication to the Peerless Company pointing out that the Prize ChitsMoney Circulation Schemes conducted by the Company came within the purview of the and there fore the Company was under an obligation to submit a wind ing up plan under Rule 4 of the Prize Chits and Money Circu lation Schemes Banning West Bengal Rules 1979
On September 3 1979 the Company filed a writ petition in the Calcutta High Court for a declaration that the did not apply to the business carried on by the company
A Rule was issued and an Interim Order was made in favour of the company first for a limited period and later till the disposal of the writ petition
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 Rule and Interim Order were issued
During the pendency of the writ petition exemption was refused by the Reserve Bank on 193
Appeals preferred by the company under the Letters Patent against the judgment of the Single Judge were al lowed
It was declared that the business carried on by the company did not come within the mischief of the 
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 have preferred Civil Appeal Nos3562 3563 3564 3565 and 4459 of 1986
In the course of the judgment the Division Bench of the Calcutta High Court had observed that the company was a financial institution within the meaning of paragraph 11 of the Non Banking Financial Companies Reserve Bank Directions 1977 and therefore the Directions contained therein applied to the business carried on by the company
Against this observation of the Division Bench the Company has also preferred Civil Appeal Nos
3566 and 3567 of 1986
After the judgment of the Division Bench of the Calcutta High Court the Company pursuant to the observations of the Division Bench that it was a financial institution within the meaning of paragraph 11 of the Non Banking Financial Companies Directions applied afresh to the Reserve Bank of India for exemption from complying with the Directions
The Reserve Bank of India by its order dated August 22 1986 refused to grant the exemption sought
The company has filed another writ petition in the Calcutta High Court against the said refusal by the 7 Reserve Bank to grant exemption
Therefore the court pre ferred to apply Non liquet on the question whether the company is a financial Institution within the meaning of para 11 of the Non Banking Financial Companies Reserve Bank Directions
Dismissing the appeals of Reserve Bank of India
Union of India and the State of West Bangal the Court
HELD Per Chinnappa Reddy J 1 1 Legislatures resort to inclusive definitions i to enlarge the meaning of words or phrases so as to take in the ordinary popular and natural sense of the words and also the sense which the statute wishes to attribute to it ii to include meanings about which there might be some dispute or iii to bring under one nomenclature all transactions possessing certain similar features but going under differ ent names
Depending on the context in the process of enlarging the definition may even become exhaustive
By using the word the Legislature did not intend to so expand the meaning of prize chit as to take in every scheme involv ing subscribing and refunding of money
The word includes the context shows was intended not to expand the meaning of prize chit but to cover all transactions or arrangements of the nature of prize chits but under different names
The expression Prize chit had nowhere been statutorily defined before
The Bhahatosh Datta Study Group and the Raj Study Group had indentified the schemes popularly called Prize Chits
The Study Group also recognised that Prize Chits were also variously called benefitsavings schemes and lucky draws and that the basic common features of the schemes were the giving of a prize and the ultimate refund of the amount of subscriptions vide para 63 of the report of the Raj Study Group
It was recommended that prize chits and the like by whatever name called should be banned
Since prize chits were called differently prize chits benefit sav ings schemes lucky draws etc
it became necessary for the Parliament to resort to an inclusive definitions so as to bring in all transactions or arrangements containing those two elements
In defining the expression prize chit the Parliament did not intend to depart from the meaning which the expression had come to acquire in the world of finance the meaning which the Datta and the Raj Study Groups had given it
42D H43A B 12 Interpretation must depend on the text and the context
They are the bases of interpretation
One may well say if the text is the texture context is what gives the colour
Neither can be ignored
Both 8 are important
That interpretation is best which makes the textual interpretation match the contextual
A statute is best interpreted when the object and purpose of its enact ment is known
With this knowledge the statute must be read first as a whole and then section by section clause by clause phrase by phrase and word by word
If a statute is looked at in the context of its enactment with the glasses of the statute maker provided by such context its scheme the sections clauses phrases and words may take colour and appear different than when the statute is looked at without the glasses provided by the context
With these glasses the court must look at the Act as a whole and dis cover what each section each clause each phrase and each word is meant and designed to say as to fit into the scheme of the entire Act
No part of a statute and no word of a statute can be construed in isolation
Statutes have to be construed so that every word has a place and everything is in its place
It is by looking at the definition as a whole in the setting of the entire Act and by reference to what preceded the enactment and the reasons for it that the court construed the expression Prize Chit in Srinivasa
43B F 13 Therefore the two requirements mentioned in the two clauses i and ii of the definition are not to be read disjunctively they are two distinct attributes of Prize Chits each of which has to be satisfied
The Conventional Chit satisfies both the requirements of the definition of Prize Chit since it involves both the certain and the chance elements the certain element being the refund of the amount of subscriptions less the deductions and the chance element being the time of such payment dependent on the result of the draw or auction
Yet the definition of Prize Chit expressly excludes the Conventional Chit obvi ously for the reason that the chance element is overshad owed by the certain element
If so no construction may be placed on the definition so as to bring in all Recurring Deposit Schemes even if they do not involve a chance ele ment
Such a construction would reduce the definition to a near absurdity and render the reference to the giving or awarding of a prize or girl a meaningless superfluity
If a conventional chit is not a Prize Chit by definition there appears to be no logic in construing the definition to include a Recurring Deposit Scheme
43H44A D 2
The argument that the two clauses i and ii are to be read disjunctively and that they should not be read as if they are joined by the conjunction and cannot be accepted
There is no need to introduce the word or either
How clauses i and ii of s2e have to be read depends on the context
The context requires the definition to be read as if both clauses are satisfied
There is nothing in the text which 9 makes it imperative that it be read otherwise
Each of the clauses i and ii contains a number of alternatives and it is to those several alternatives that the expression all or any of the following purposes refers and not to i or ii which are not alternatives at all
In fact a prize chit by whatever name it may be called does not contem plate the exhaustion of the entire fund by the giving of prizes it invariably provides for a refund of the amount of subscription less the deductions to all the subscribers or to those who have not won prizes depending on the nature of the scheme
Clauses i and ii refer to the twin at tributes of a prize chit or like scheme and not to two alternate attributes
44D G 22 While it is possible to say that Parliament desired to root out prize chits and schemes of like nature involving the vicious element of gambling it is inconceivable that Parliament intended to visit even subscribers to Recurring Deposit Schemes involving no such vice with such dire conse quence
Therefore section 2e of the Act does not contem plate a scheme without a prize and therefore the endowment certificate scheme of the Peerless Company is outside the Prize Chits and Money Circulation Scheme Banning Act 1978
45A BE Srinivasa Enterprise vs Union of India   Ardeshir Bhiwandiwala vs State of Bombay  CIT Andhra Pradesh vs Taj Mahal Hotel  and SK Gupta vs
KP Jain  referred to
Despite Articles 38 39 41 and 43 of the Constitu tion the Life Insurance Corporation of India an instrumen tality of the State which is given the monopoly of Life Insurance business in the country has taken no steps to offer proper security and protection to the needy poor rural folk
If the Life Insurance Corporation is really interested in the treating the poorer policy holders less harshly and more liberally the time has come for the Life Insurance Corporation to revise its terms and conditions and to think in the directon of deleting the forfeiture clause altogether as has now been done by the Peerless Company or to delete it at least from life policies for small amounts
Perhaps the Life Insurance Corporation may think of short term small amount policies with no forfeiture clause and with some incentive such as a reduced premium for continuing to pay premiums regularly
It is hoped with the management expertise at its command the Life Insurance Corporation of India can devise a myriad ways of serving the poorer sec tions of the people of our country as also to tap the huge untapped Savings resources the existence of which has been brought home by companies like the Peerless however wrong headed their business methods might 10 be
It is a matter of common knowledge that the return to a policyholder who survives the period of the policy is very poor
It may be true that the Life Insurance Corporation is paying higher bonus year after year but the bonus comes out of the amounts of the forfeited policies and it means that it is really the poor class of policy holders whose policies are forfeited that are paying bonus to the class of policy holders who are better off
This surely is not what is contemplated by article 382 of the Constitution which talks of minimising the inequalities in income not only amongst individuals but also amongst groups of people and article 39c which requires the State to secure that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment
18F H 19A D Per Khalid J A close study of the definition makes the conclusion inescapable that the Peerless scheme does not come within it
Any attempt to bring the activities of the Peerless within the definition has only to fail
It would not be proper to refer to the observations in the judgment in Srinivasa s case on section 2e of the Act either as obiter or per incuriurn
11G When the activities of the Peerless and the Life Insur ance Corporation are considered juxtaposed one is tempted to observe that Peerless is less harsh than the Life Insur ance Corporation
The Life Insurance Corporation enjoys many privileges
It has a duty to be above suspicion
It has a duty to serve people in the right manner
The Life Insurance Corporation should at least in future be liberal and gener ous when claims are made by those unfortunate few who when robbed of their bread earners claim for the insured amount and who are invariably met on technical pleas of concealment of ailment and the like
The Life Insurance Corporation does not come out with glory when some of its dealings are con sidered
12B D