ition Civil No 677 of 1991
Under Article 32 of the Constitution of India WITH Civil Appeal Nos400 403 of 1992
Shanti Bhushan Somnath Chatterjee Biswarup Gupta Bhaskar Gupta GL Sanghi Arun Jaitley Dr Debi Pal Anil Diwan AK Sen Harish N Salve HS Prihar Kuldip section Parihar Gopal Subramanium Abhijit Chatterjee B Lahiri JB Dadachanji SSukumaran RF Nariman GS Chatterjee Ms Sumita Chatterjee Ms Mridula Ray Arun Madan Ms Priya Hingorani Ms Radha Rangaswamy CN Sreekumar Rathin Das Ranjit Ghose Sushil Kumar Jain Sudhanshu Atreya and Dr AM Singhvi for the appearing parties
The Judgment of the Court was delivered by KASLIWAL J
Special Leave granted in all the petitions
This litigation is an upshot of the earlier case Reserve Bank of India vs Peerless General Finance and Investment Company Ltd and Others  decided on January 221987
In 1978 th Prize Chits and Money Circulation Scheme Banning Act 1978 in short the Banning Act was enacted to ban the promotion or conduct of prize chits or money circulation schemes and for matters connected therewith or incidental hereto  The question which arose in the above case was whether the Endowment Scheme piloted by the Peerless General Finance and Investment Company Ltd hereinafter in short the Peerless  fell within the definition of Prize Chits  within  the meaning of Sec 2e of the above Banning Act
By a letter dated July 23 1979 the Reserve Bank of India pointed out to the Peerless that the schemes conducted by it were covered by the provisions of the Banning Act which had come into force wef December 12 1978
On September 3 1979 the Peerless filed a writ petition in the Calcutta High Court for a declaration that the Prize Chits Banning Act did not apply to the business carried on by the Peerless
A similar writ petition was filed questioning a notice issued by the Madhya Pradesh Government on the same lines as that issued by the West Bengal 419 Government
A learned Single Judge of the High Court dismissed both the writ petitions but appeals preferred by the Peerless under the Letters Patent were allowed by a Division Bench of the Calcutta High Court
It was declared that the business carried on by the Peerless did not come within the mischief of the Prize Chits Banning Act
Against the judgment of the Division Bench of the Calcutta High Court the Reserve Bank of India the Union of India and the State of West Bengal preferred appeals before this court
The question considered in the above case was Is the endowment scheme of the Peerless Company a Prize Chit within the meaning of Section 2e of the Prize Chits and Money Circulation Schemes Banning Act   This court held that section 2e does not contemplate a scheme without a prize and therefore the Endowment Certificate Scheme of the Peerless Company was outside the Prize Chits Banning Act
Appeals filed by the Reserve Bank of India the Union of India and the State of West Bengal were accordingly dismissed
Chinnappa ReddyJ observed 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 thousand of employees
We must also record our dissatisfaction with some of the schemes of the Life Insurance Corporation 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 savings 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 It was further observed 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 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 speculative 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 spend 420 ing the vacation carried as many as ten advertisements with banner headlines  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 advertisers offered to double the deposit in 30 months 2000 for 1000 10000 for 5000 they said
Another advertiser offered interest ranging between 30 per cent to 38 per cent for periods ranging between six months to five years
Almost all the advertisers offered extra interest ranging between 3 per cent to 6 per cent if deposits were made during the Christmas Pongal season
Several of them offered gifts and prizes
If the Reserve Bank of India considers the Peerless Company with eight hundred crores invested in government securities fixed deposits with National Banks etc
unsafe for depositors one wonders what they have to say about the mushroom non banking campanies which are accepting deposits promising most unlikely return and what action is proposed to be taken to protect the investors
It does not require much imagination to realise the adventurous and precarious character of these business
Urgent action appears to be called for to protect the public
While on the one hand these schemes encourage two vices affecting public economy the desire to make quick and easy money and the habit of excessive and wasteful consumer spending on the other hand the investors who generally belong to the gullible and less affluent classes have no security whatsover
Action appears imperative   Khalid J another learned Judge aggreeing with the judgment of Chinnappa Reddy J further added his short but important concluding paragraph as under  I share my brother s concern about the 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 necessary for the authorities to evlove 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 enterprises who pose themselves as benefactors of people   Taking note of the weighty observations made by this Court the 421 Reserve Bank of India in exercise of the powers conferred by Section 45 J and 45 K of the hereinafter referred to as the Act and of all the powers enabling it in this behalf and considering it necessary in the public interest issued certain directions by notification No DFC55DGO 87 dated the 15th May 1987 hereinafter referred to as the directions of 1987 
The constitutional validity of these directions of 1987 was challenged by Timex Finance and Investment Company Ltd hereinafter referred to as Timex Company  by filing a writ petition in the Calcutta High Court before the learned Single Judge
The learned Single Judge granted an interim order in terms of prayers g and h of the writ petition
The Reserve Bank of India aggrieved against the interim order filed an appeal before the Division Bench
A stay petition was also moved on behalf of the Reserve Bank of India for staying the operation of the order dated 7th October 1988 passed by the learned Single Judge
After hearing the stay petition for sometime the Division Bench of the High Court listed the appeal as well as the stay petition for final disposal
The Division Bench of the High Court disposed of the appeal as well as the writ petition by an order dated March 23 1990 and arrived to the following and conclusions a Reserve Bank of India is empowered to issue directions to the residuary non banking companies under the provisions of Section 45J and 45K of the for the interest of thousands of depositors
b However to the extent such directions are found to be prohibitory or not workable and as such unreasonable must be held to be beyond the powers of the Reserve Bank of India
c The impugned directions providing that they represent irreducible minimum for safeguarding the interest of and for preventing exploitation of small and unwary depositors cannot be implemented without suitable modification
It is not reasonably practicable to comply strictly with the directions as they stand by the writ petitioners and the similarly situated companies
The Supreme Court in Peerless case Supra reserved the liberty to the Reserve Bank of India to take such steps as are open to them in law to regulate the schemes such as those granted by the Peerless to prevent exploitation of subscribers and to protect thousands of employees
The impugned directions without modifications will run counter to the aforesaid directions of the Supreme Court
d The business of savings and investments carried on by the company and similarly situated companies having not been declared unlawful or banned power of the Reserve Bank of India to regu 422 late such business cannot be permitted to be prohibitory resulting in the ultimate closure of the business carried on by the writ petitioner company and other similarly situated companies
If the modifications as suggested by us are not implemented and if ultimately the business is closed down and the company goes into liquidation the hard earned money of thousands of depositors will be lost and the employees would also lose their job
If even after modifications are made to the impugned directions in terms of this order any company fails to comply with such directions the Government may take such steps as are open to them to protect the interests of the thousands of small depositors and numerous employees
e The reasons why the impugned directions cannot be complied with and held to be unworkable and unreasonable are mainly because of the definition of liability assigned in the impugned directions
The impugned directions as they stand now cannot be implemented by the residuary non banking companies without incurring loss irrespective of their net worth
According to the impugned directions the liability is the amount of money deposited by the depositions plus the amount of interest whether or not due to them according to the terms of the respective contracts at the given point of time
In other words the entire collection with the interest Bonus etc
whether payable or not would be the liability of the Company
This leaves no fund for working
If the definition of liability is amended as suggested by us it will be possible for the companies to generate working capital
In our view liability in clause 6 and in other clauses of the impugned directions should be construed to mean total amount of contractual dues of the depositors including interest premium bonus or other advantages by whatever name called accrued on the amount according to the terms of contract
Section 45J and 45K of the Act do not authorise the Reserve Bank of India to introduce a concept of liability which is contrary to the accepted commercial practice and trading principles
The impugned directions have failed to make distinction between the actual liability in presenti and a liability de futuro
Liberty must be reserved to the companies to adopt normal accountancy practice recognised and accepted in the trading circles so long as such accounting practice provides for payment of the liability to the depositors in accordance with the contractual obligations
However the Reserve Bank of India may having regard to the facts and circumstances of each case issue directions regulating the administrative and management expenses and expenditure on com 423 mission and publicity
In the impugned directions no restriction has been imposed on the expenditure by a residuary non banking company on any of these heads
In our view the impugned directions without modifications instead of suppressing the mischief will only lead to adverse unworkable andor impracticable results inasmuch as if the residuary non banking companies cannot comply with such directions in toto such companies have to go out of existence
This cannot be the object of the impugned directions
If the liability in terms of the contractual obligations is provided not only in the accounts but also by suitable investment in terms of Clause 6 of the directions in our view all the residuary non banking companies irrespective of their net worth will be able to carry on the business
f Every residuary non banking company shall disclose its Books of Accounts and balance sheet the aggregate amount of liability accrued and payable to the depositors in accordance with the terms of the contract
g The directions contained in clause 6 for deposit or investment and the liability shall be read subject to the modification of the designation of the liability as aforesaid
h The directions are prospective
The period of deposit and the date of return with respect to all certificates issued prior to 15th May 1987 have been excluded from the purview of the directions as per clause 18 1
This exemption should include all contractual obligations on those certificates
i All funds prior to the issue of the directions should be allowed to be kept in the manner as was being done by the respective residuary non banking company
The direction with regard to the investment shall be applicable from the money collected andor received on and after 15th May 1987
The companies shall be allowed reasonable time to make good the deficiency in the investment required to be made in terms of the directions after 15th May 1987
j We are not unmindful of the fact that exercise of power by legislature and executive is subject to judicial restraint
The only check on judicial exercise of power is the self imposed dicipline of judicial restraint
But although the courts in exercise of judicial power are not competent to direct the enactment of a particular provision of law if the statutory directions suffer from arbitrariness the court is competent to issue necessary direction so that the statutory directions may be brought in conformity 424 with law
As we have held that the Reserve Bank of India has transgressed the statutory power to the extent indicated elsewhere in the judgment we are of the view that the Reserve Bank of India shall modify the directions and make them reasonable and workable to safeguard the interest of depositors and protect the employees   The Division Bench also considered an application filed by Favourite Small Investment Company and by order dated 20th December 1990 directed that the Reserve Bank of India should revoke the prohibitory order and permit Favourite Small Investment Company to accept fresh deposits and carry on new business
It may be noted that the Peerless filed a petition before the High Court for becoming a party respondent
The High Court by order dated 31st August 1990 allowed the said application and further ordered that the cause title and the records proceedings of appeal memorandum of appeal and the paper book filed be amended accordingly
The Peerless also moved an application for clarification of the judgment and order dated 23rd March 1990
It prayed that suitable provision should be made for a depositor who wants back the money before maturity
If the depositor intends to get refund of the money invested before the expiry of actual contract period he should be required to keep the funds for a minimum period in accordance with the contract
Before maturity he can only take loan but not the principle amount with interest
The amounts of returns should also be less than 5 per cent to provide for the collection and other expenses of the non banking companies
The Division Bench of the High Court took the view that the order dated 23rd March 1990 required clarification as it was not made clear as to whether non residuary banking companies are under an obligation to pay discontinued certificates before the stipulated period in the contract if so what would be the rate of interest
The Division Bench by order dated December 24 1990 clarified its earlier order dated 23rd March 1990 as under  a If the contract by and between the company and the depositor provides that no payment on discontinued certificate will be made before the expiry of the term stipulated in the contract in such cases if the certificate is discontinued any time before such stipulated term and payment is made to the depositors according to the terms and conditions of the contract in other words on the expiry of the term stipulated in the contract such depositor shall be paid interest at the rate of 8 compound per annum but in such a case the company will be at liberty to deduct an amount not exceeding 5 from the total return in or to provide for collection and other expenses incurred in connection with these 425 discontinued certificates b In cases where certificates are discontinued before or after the stipulated term but the depositors obtain refund only upon maturity of the certificates such refund shall be made to depositors with compound interest at the rate 8  per annum without any deduction whatsoever
c Since no payment will be made against the discontinued certificates to the depositors in such cases shall be permitted to take loan if they so intend against the payment made till discontinuance of such terms and conditions as the company may stipulate
 The Reserve bank of India aggrieved against all the above orders of the Calcutta High Court has filed appeals against the orders dated 23 rd March 1990
31st August 1990 20th December 1990 and 24th December 1990
The Peerless General Finance and Investment Company Ltd has also filed a writ petition No 677 of 1991 directly before this Court under Article 32 of the Constitution of India
In view of the fact that the questions raised in the appeals filed by the Reserve Bank of India against the orders of the High Court and in the civil writ petition filed by the Peerless Company are common the same were heard together and are disposed of by a single order
Interlocutory applications were also filed on behalf of the employees of the Peerless Company agents of Peerless Company working in the field and some of the depositors in the Peerless company
We have heard them also
The main controversy centers round paragraphs 6 and 12 of the directions of 1987 and as such the same are reproduced in full
Paragraph 6 Security for depositors On and from 15th May 1987 1 Every residuary non banking company shall deposit and keep deposited in fixed deposits with public sector banks or invest and keep invested in unencumbered approved securities Such securities being valued at their marked value for the time being or in other investments which in the opinion of the company are safe a sum which shall not at the close of business on 31st December 1987 and thereafter at the end of each half year that is 30th June and 31st December be less than the aggregate amounts of the liabilities to the depositors whether or not such amounts have become payable 426 Provided that of the sum so deposited or invested a not less than ten percent shall be in fixed deposits with any of the public sector banks
b not less than 70 percent shall be in unapproved securities c not more than 20 percent or ten times the net owned funds of the company whichever amount is less shall be in other investments provided that such investments shall be with the approval of the Board of Directors of the Company
Explanation  Net owned funds shall mean the aggregate of the paid up capital and free reserves as appearing in the latest audited balance sheet of the company as reduced by the amount of accumulated balance of loss deferred revenue expenditure and other intangible assets if any as disclosed in the said balance sheet
2 Every residuary non banking company shall entrust to one of the public sector banks designated in that behalf deposits and securities referred to in clauses a and b of the proviso to subparagraph 1 to be held by such designated bank for the benefit of the depositors
Such securities and deposits shall not be withdrawn by the residuary non banking company or otherwise dealt with except for repayment to the depositors
3 Every residuary non banking company shall furnish to the Reserve Bank within thirty days from the close of business on 31st December 1987 and thereafter at the end of each half year that is as on 30th June and 31st December a certificate from its auditiors being members of Institute of Chartered Accountants to the effect that the amounts deposited in fixed deposits and the investments made are not less than the aggregate amounts of liabilities to the depositors as on 30th June and 31st December of that year
Explanation  For the purpose of this paragraph a Aggregate amounts of liabilities shall mean total amount of deposits received together with interest premium bo 427 nus or other advantage by whatever name called accrued on the amount of deposits according to the terms of contract
b approved securities means the securities in which the Trustee is authorised to invest trust money by any law for the time being in force in India and bonds or fixed deposits issued by any corporation established or constitued under any Central or State enactments
c public sector banks means the State Bank of India the Subsidiary Banks and the corresponding new banks referred to in Section 451 of the 2 of 1934
d unencumbered approved securities shall include the approved securities lodged by the company with another institution for advances or any other credit arrangements to the extent to which such securities have not been drawn against or availed of
Paragraph 12 Every residuary non banking company shall disclose as liabilities in its books of accounts and balance sheets the total amount of deposits received together with interest bonus premium or other advantage accrued or payable to the depositors
We would first deal with the legal objections raised on behalf of the Peerless and other companies
It has been submitted on behalf of the Peerless and other companies that the directions of 1987 are ultra vires of Section 45J and 45K of the Reseve Bank of India Act 1934
None of the said sections authorises the Reserve Bank to frame any directions prescribing the manner of investment of deposits received or the method of accountancy to be followed or the manner in which its balance sheet and books of accounts are to be drawn up
It has been contended that Section 45J has no manner of application in the present case
Section 45K 3 of the Act on which reliance has been placed on behalf of the Reserve Bank merely provides that the Reserve Bank may if it considers necessary in the public interest so to do give directions to non banking institutions either generally or to any non banking institutions in particular in respect of any matters relating to or connected with receipts of deposits including the rate of interest payable on such deposits and the purpose for which deposits will be received
According so Sec
45K 4 if any non banking institution fails to comply with any direction given by the bank under sub 428 section 3 the Reserve Bank may prohibit the acceptance of deposits by that non banking institution
It is thus submitted that on a plain reading of Sec
45K 3 the Reserve Bank is only competent to frame the directions regarding receipt of deposits and such power of direction does not extend to providing the manner in which deposits can be invested or the manner in which the liabilities are to be disclosed in the balance sheet or books of accounts of the company
It is further submitted that the power under subs
4 is to prohibit acceptance of deposits and as such the permissible field of direction making is limited to receipt of deposits and nothing more
The Reserve Bank of India in framing the directions of 1987 which is a subordinate piece of legislation has clearly over stepped the bounds of the parent statue of Sec
45K 3 of the Act
It is further argued that the Reserve bank cannot contend that paragraphs 6 and 12 of the directions of 1987 are covered within the powers conferred on the Reserve Bank under Sec
45L 1 b of the Act
It is submitted that the Reserve Bank had at no point of time expressed its intention to invoke its powers under Sec
45L Even before the Division Bench of the Calcutta High Court the Reserve Bank did not rely on Sec
45L as alleged source of its power to issue the impugned directions nor the Reserve Bank referred to Sec
45L in its pleadings before the High Court
Wherever the Reserve Bank of India wanted to invoke its power under Sec 45L of the Act it has expressly mentioned that it was exercising its powers under Sec
45L In the case of non banking financial companies Reserve Bank directions 1977 or the miscellaneous non banking companies Reserve Bank Directions 1977 it has expressly said that it was invoking its powers under sec
45L of the Act whereas in the case of the impugned directions the Reserve Bank has only referred to sections 45J and 45K of the Act
The Reserve Bank of India itself in the affidavit filed before the High Court had stated that the directions of 1987 were framed after careful deliberations at the highest level and now it cannot take the stand that the source of its power in framing the impugned directions was exercised under sec 45L of the Act
It is further contended that in order to invoke the powers under sec 45L of the Act it has to state that the Reserve Bank was satisfied for the purpose of enabling it to regulate the credit system of the country to its advantage and it was necessary to give such institutions directions relating to the conduct of business by financial institution or institutions
In order to exercise its powers under sec
45L of the Act it has to apply its mind for the purpose of arriving at the statutorily required satisfaction
In fact such recital is necessary since such satisfaction is a pre conditions for the Reserve Bank to exercise its powers under section 45L of the Act
On the other hand it has been contended on behalf of the Reserve 429 Bank that the power of the Reserve Bank to regulate deposit acceptance activities of non banking and financial institutions under Chapter IIIB of the Act cannot be disputed
The Reserve Bank has power to issue the impugned directions under Section 45J 45K and 45L of the Act
The pith and substance of Para 6 of the directions of 1987 is to ensure that deposits received from the public are invested in a manner to secure the repayment of the deposits
A deposit is by definition a sum of money received with a corresponding obligation to repay the same
Thus the repayment of the deposit is an integral part of the transaction of a receipt of deposit
It is contended that the expression receipt of deposit must be construed liberally in the light of the nature of the provisions as well as in the light of the wide language used in the provision
It is also argued that even if the impugned directions of 1987 are not covered under the powers conferred under Sections 45J and 45K of the Act those are squarely covered by Section 45L of the Act
It is submitted that various provisions under the Act are enabling in nature and confer overlapping powers
Even if there is no recital of Sec
45L it would not be of much consequence if such exercise of power can be related to Sec
45L of the Act
We have considered the arguments advanced by learned counsel for the parties
Chapter IIIB laying down provisions relating to non banking institutions receiving deposits and financial institutions was inserted in the  by virtue of Act 55 of 1963 wef 121964
Section 45J 45K 3  4 and 45L 1 b relevant for our purpose are given as under  Sec
45J The Bank may if it considers necessary in the public interest so to do by general or special order a regulate or prohibit the issue by any non banking institution of any prospectus or advertisement soliciting deposits of money from the public and b specify the conditions subject to which any such prospectus or advertisement if not prohibited may be issued
Section 45K 1   2   3 The Bank may if it considers necessary in the public interest so to do give direction to non banking institutions either generally or to any 430 non banking institution or group of non banking institutions 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
4 If any non banking institution fails to comply with any direction given by the Bank under sub section 3 the Bank may prohibit the acceptance of deposits by that non banking institution
Section 45L 1 If the bank is satisfied that for the purpose of enabling it to regulate the credit system of the country to its advantage it is necessary so to do it may a   b give to such institutions either generally or to any such institution in particular directions relating to the conduct of business by them or by it as financial institutions or institution
A combined reading of the above provisions unmistakably goes to show that the Reserve Bank if considers necessary in the public interest so to do can specify the conditions subject to which any prospectus or advertisement soliciting deposits of money from the public may be issued
It can also give directions to non banking institutions in respect of any matters relating to or connected with the receipt of deposits including the rates of interest payable on such deposits and the periods for which deposits may be received
This latter power flows from sub section
3 of Sec
45K of the Act
The Bank under this provision can give directions in respect of any matters relating to or connected with the receipt of deposits emphasis added
In our view a very wide power is given to the Reserve Bank of India to issue directions in respect of any matters relating to or connected with the receipt of deposits
It cannot be considered as a power restricted or limited to receipt of deposits as sought to be argued on behalf of the companies that under this power the Reserve Bank would only be competent to stipulate that deposits cannot be received beyond a certain limit or that the receipt of deposits may be linked with the capital of the company
Such interpretation would be violating the language of Sec
45K 3 which furnishes a wide power to the Reserve Bank to give any directions in respect of any matters relating to or connected with the receipt of deposits
The Reserve Bank under this provision is entitled to give directions with regard to the manner in which the deposits are to be invested and also the manner in which such deposits are to be disclosed in the balance sheet or books of accounts of the company
The word any  quali 431 fying matters relating to or connected with the receipt of deposits in the above provision is of great significance and in our view the impugned directions of 1987 are fully covered under Sec
45K 3 of the Act which gives power to the Reserve Bank to issue such directions
As a proposition of law we agree with the contention of the learned counsel for the Reserve Bank that when an authority takes action which is within its competence it cannot be held to be invalid merely because it purports to to be made under a wrong provision if it can be shown to be within its power under any other provision
Learned counsel in this regard has placed reliance on Indian Aluminium Company etc
vs Kerala State Electricity Board  In our view as already held above the Reserve Bank was competent and authorised to issue the impugned directions of 1987 in exercise of powers conferred under Section 45K 3 of the Act
Having cleared the ground of ultra vires we must now turn to the main challenge posed on behalf on the Peerless and other companies and employees
Mr Harish Salve made the leading arguments on behalf of the Reserve Bank of India
His main thrust of the argument was that the Reserve Bank of India had issued these directions of 1987 in order to carry out observations made by this Court in Peerless case supra and in the public interest of safeguarding the money of the depositors in such companies
The Reserve Bank considered it necessary that the interest of millions of small depositors of rural areas should be made safe and may not be devoured by a mushroom of companies with no stake
According to Mr Salve it was not the intention of the Reserve Bank to put any restrictions in the manner or conduct of business to be done by such companies
But the most important factor weighing in the mind of the Reserve Bank was to safeguard the money of the depositors
It was not the concern of the Reserve Bank as to how and in what manner these companies would regulate their expenses or would be able to conduct such business for earning more profits
According to the Reserve Bank of India these companies cannot be allowed to spend a mighty of deposits for meeting their own expenses
They should find out their own resources for meeting the expenses
According to the Reserve Bank the rate of interest to be paid by these companies to the depositors has been fixed as 10 per cent per annum
They could easily invest such amount in bonds issued by public sector corporation and earn interest at the rate of 14 per cent per annum or more and thereby earn a profit of 4 per cent and regulate their expenses within the limits of such profits
It was submitted that the propensity of the 432 problem has increased manifold in view of the fact that the amount of deposits and investments has gone to staggering heights worth several thousand crores of lower middle class persons living mostly in the rural areas
A bogey of employment hazards of several thousand regular employees and still a large number of agents working in the field cannot deter the Reserve Bank to lay down some directions which may act harshly and resulting in lessening of profits of such companies
It was also submitted that according to the affidavit submitted before this Hon ble Court on behalf of the Reserve Bank of India it has been stated that prior to 1987 directions there were 747 such companies which were conducting deposit scheme
At present they could classify only 392 such companies as required information for classifying of the remaining companies had not been received
Most of such companies have not designated their banks as it required under paragraph 6 of the directions and in most of such cases amounts invested in bank deposits and approved securities fall much short of deposit liabilities
The companies operating in these areas also at times become untraceable in that a number of show cause notices issued have been returned as addressee not known etc
In some cases those who have chosen to reply have given evasive replies
It has been further stated in the affidavit that most of these companies did not comply with the financial discipline sought to be imposed upon them and have avoided and abhorred any scrutiny into their accounts
It has thus been submitted that to get over these difficulties the directions of 1987 attempt to provide a steady stable identificable and monitorable method by which the companies will be able to disclose all their true liabilities and also utilise the money raised from the depositors for investment in safe indentifiable and quantifiable securities instead of investing them in other ventures
This will ensure complete security to the depositors at all times and will also make the accounts of the companies comprehensible and easy to monitor
As regards the formula laid down by the High Court it has been submitted that if a variable as against a fixed and definite percentage of investment with respect to amounts collected by way of each instalment is permitted it would be impossible to find out and verify whether the amounts invested are in accordance with the directions at any given point of time when there are thousands of certificates with different and varying maturity periods
In the circumstances the formula laid down by the High Court is self defeating and also deprives the depositor of the security envisaged under the directions
It was also submitted on behalf of the Reserve Bank that it is an admitted position that the business of RNBCs is to collect funds from the public and invest the same in Government securities and bank deposits
In 433 the application forms and in the advertisement s issued by these companies it is expressly held out to the public that their moneys are safe with the banks and in Government securities
It is the very nature of their business which makes it non viable if they are to give fair return to the depositors and private security for the repayment of their money
The scheme of control as provided in the directions of 1987 might be harsh but the same is in conformity with the assertions held out by these companies to the public at large
These directions subject the companies to proper discipline by monitoring their actions and such directions cannot be considered as unreasonable
The reasonableness of the directions when looked at from the point of view of the depositors for whose safeguard they have been issued is beyond question
Return provided and the security to be given through proper investment cannot be faulted on any ground
Thus what seems to be an impossible situation for these companies is not due to the impugned directions but because of the nature of business itself
The funds are collected at exhorbitant costs and on that account it becomes difficult for the companies to give a fair return to the depositors
These companies are not genuine investment companies
If they want to do genuine investment business they can do so by choosing freely their investment but in that case Reserve Bank of India directions applicable to such companies would permit them to accept deposits not exceeding 25 per cent of paid up capital and reserve
The directions of 1987 had not imposed any restriction on the right to carry on business but those directions only place a restriction with respect to one of the modes of raising reserves ie through public deposits
It has been further argued that the reasonableness of the directions has not to be looked into from the point of view of the company to whom any such restrictions will be irksome and may therefore be regarded as unreasonable
The framing of the directions are only regulatory in nature keeping in view the interest of the depositors without unduly jeopardising the interest of the employees
Keeping this in mind it has been provided that the minimum return would be at 10 per cent though there are govt
and public sector bonds which pay interest at a much higher rate
Even presently bank deposits and other company deposits give return varying between 13 to 15 per cent
There is no limitation on the quantum of deposits with reference to the overall capital as shown in the case of companies governed by the Companies Acceptance of Deposits Rules 1975 Non Banking Financial Companies Reserve Bank Directions 1977
The linking of deposits with capital as in the case of other regulations is a measure to secure the interest of the depositors namely eg Companies Acceptance of Deposit Rules 1975 ensure that the assets 434 are at least three times the deposits received
In view of the low or total non existent capital of the RNBCs it was not possible to secure the deposits in this manner
Instead it has been provided that the entire liability towards the depositors should be invested and no part of the deposits be utilised for payment of commission etc
or incurring other expense
In any event even if the directions do not prescribe existence of owners capital as security it does not imply that it is permissible to use the deposits received to bridge the time gap between income and expenditure
Merely because the directions do not fix a ceiling on the rate of commissions it does not imply that the Reserve Bank has granted its permission to payment of high commission or incurring of large expenses on management etc
The RNBCs are free to incur such expenses and organize their business as they desire as long as the depositors are fully secured at all times
The contention that the business of the RNBCs will close down if the directions of 1987 are to be adhered to is not based on facts and misconceived in law
A perusal of Directors  Report of Peerless for the years 1988 1989 and 1990 clearly go to show that they did not consider the company in any financial difficulty and in fact paid larger dividends even after complying with the impugned directions of 1987
It has thus been submitted that given a wide latitude in judging the validity of economic legislation on the touch stone of reasonableness in the absence of patent arbitrariness but having nexus with the public objective sought to be attained the durations cannot be condemned as being violative of Article 191 g
The result of the contentions put forward on behalf of RNBCs would be that in the case of endowments repayable after say 10 years there will be nothing due and payable in the first nine years and as such there would be no need of investing any sums for the first nine years
The interpretation placed by the respondent companies upon the judgment of the High Court is that it is now open to them to determine as per their own peculiar estimate what would be sufficient to meet the liabilities towards the deposits and accordingly such amount would be their aggregate liability
According to the Peerless Company if it deposits 75 per cent of the first year s subscription it is adequate to cover its liabilities to the depositors
On the other hand as per Timex Company a deposit of only 50 per cent of the first year s subscription would be adequate to cover its liabilities to the depositors
Whereas the Favourite Company contends that investment of 40 per cent of the first year s subscription will be adequate to cover the liabilities to the depositors
It has been submitted that according to well accepted accounting practice where any sum is received as a loan or as a deposit it has to be shown as a liability together with accrued interest irrespective of when it is due
The amount contributed by the depositors being a capital receipt and not a revenue receipt cannot under any circumstances be shown in the 435 balance sheet otherwise then at its full value
Moreover being a capital receipt it cannot be credited to the profit and loss accounts since Part II of Schedule VI to the requires that the amounts to be shown in the profit and loss accounts should be confined to the income and expenditure of the company
Thus crediting a part of the first and subsequent year s deposit instalments to the profit and loss account and not showing them fully as a liability in the balance sheet would be a contravention of the provisions of the 
It has been further submitted on behalf of the Reserve Bank that the question which arises for consideration is whether liability to the depositors can be calculated on an actuarial basis
It may be noted that actuarial basis is normally adopted a in respect of items of income and expenditure b where there is a significant element of uncertainty
Thus in so far as the liability arising out of the repayment to the depositors of the amount capitalised by him is considered the actuarial basis cannot be adopted and this liability must always be stated at its full value
The principle of actuarial valuation is in opposite for the business of RNBCs
It has also been submitted that the formula laid down by the High Court about the quantum of investments to be made by RNBCs is incapable of effectively monitoring and hence the provisions made in the directions of 1987 regarding security to depositors would be rendered wholly illusory
Such impossibility in the monitoring has been demonstrated as follows A These companies do not fix a definite but variable percentage of investment with respect to amounts collected by way of each instalment under the certificates of deposits eg Peerless would invest 75  of the collections made out of 1st instalment retaining and taking to P  L Ac 25  and 82  out of 2nd instalment and so on
At any given point of time there will be thousands of deposit certificates with varying maturity and the amounts collected would be an impossibility to find out and verify whether the amounts invested are in accordance with the proportion fixed by the companies with respect to each instalment
Regulatory authority would have to depend entirely on these companies for doing its monitoring exercise
B Each company fixes its own proportion of investment with respect to each instalment based on the projected yield from its investment eg Favourite Finance Company claims that it needed to invest only 40  of the amounts collected by way of 1st instalment claiming that the projected yield from its investment would be 148 
This would compound the impossibility of monitoring further
436 It has thus been argued that the formula laid down by the High court is self defeating and depriving altogether benefits of security provisions given to depositors under the directions of 1987
Mr Somnat Chatterjee learned senior counsel appearing on behalf of Peerless Company contended that the Peerless being the largest RNBC in india having an impeccable record of public service decided to give effect to the directions of 1987 as it wanted to avoid any confrontation with Reserve Bank and further not to give an impression of seeking to avoid regulatory control tried its best to comply with the said directions wef 15th May 1987 till 31st March 1989
However from its working results it appeared bonafide to the Board of Directors of Peerless that it was impossible to carry on its traditional business for any longer period without incurring huge losses
The company as such decided to approach the High Court for obtaining the benefit of judgment delivered in the Timex case
The Peerless has only challenged a part of Paragraph 6 of the directions of 1987 and the consequential direction contained in para 12 which shows that Peerless does not wish to remain outside of the regulatory controls of Reserve Bank but challenges only those directions which make the business totally unworkable
There has been no attempt on the part of Peerless to carry on its business in a manner which may jeopardize the interest of any depositor or which will not protect fully every paisa deposited with Peerless at all points of time
No real complaint was made by or on behalf of Reserve Bank as to any depositor of Peerless running a risk of loss of any amount or that it has carried on or is carrying on the business in an undesirable manner
It has been submitted that Peerless should not be made to suffer for the illegality or improprieties if any committed by any other RNBC and neither Peerless nor its 14 lac field agents 3 thousand field officers and 4 thousand direct employees should be made to suffer
The result of following directions of 1987 would be that all the above agents officers and employees of the Peerless could loose their jobs and their family members will be thrown on the streets
The Peerless had abolished the provision of forfeiture in all its schemes as early as in 1986 that is even prior to coming into force of the directions of 1987
The Peerless has been compelled to challenge paragraphs 6 and 12 of the directions of 1987 since enforcement of these provisions would result in complete annihilation of the undertaking of Peerless in the near future
It was further contended that it is inherent in the business carried on by Peerless and other similar RNBCs that the working capital is generated out of the subscriptions received from the certificate holders
Such business comprises in collecting subscriptions from depositors either in lumpsum 437 or in instalments and such deposits are paid back with the guaranteed accretions bonus interest etc
in terms of the contract at the end of the stipulated term
Through this business such companies have rendered great and commendable service to the nation in mobilizing small savings and giving a boost to the movement of capital formation in the country
Such companies have placed at the disposal of Governmental institutions including public sector banks and other financial institutions huge deposits which could not be collected by the said financial institutions themselves or by anybody in the organised sector
The method followed by the companies in carrying on the aforesaid business is that a certain portion of the subscriptions received by it is transferred to the profit and loss account shown as income and the same is used to defray inevitable working capital requirements of the company namely payment of agent s commission management expenses staff salaries and other overheads
However the balance of the subscriptions excluding the appropriated part is transferred to a fund each year and the corpus of the fund is invested in turn in interest bearing investment
The Peerless company initially used to transfer approximately 95  of the first year s subscriptions to the profit and loss account and used to invest the subscriptions received from the second year onwards
However at present Peerless is appropriating 25  of the first year s subscription to the profit and loss account and investing the balance 75  in the manner and mode prescribed by paragraph 6 of the directions of 1987
It has been contended that the investment is planned in such a manner that at the end of the contractually stipulated maturity period or at any other point of time when any sum of money may become contractually payable to a depositor an RNBC is always in a position to pay all its conractual dues to the certificate holder
There is thus no threat to the safety of the depositors money inspite of the aforesaid transfer of a portion of the subscription received to the profit and loss account showing it as income and utilising it for meeting the working capital requirements
It was pointed out that Peerless had been assessed to income on the basis of above method of accounting and no objection has ever been taken by the revenue authorities or by the auditors of Peerless or even by RBI before the issuance of the directions of 1987
It was submitted that the Peerless was incorporated in the year 1932 when it used to carry on life insurance business
It changed over to the present form of business from 1956 and since then it has been carrying on such business with the full knowledge of RBI as well as other concerned authorities
The RBI never objected to the accounting system followed by the Peerless
In view of the abolition of the forfeiture clause the alleged risk to the depositors has become totally non existent
It was further argued that the RBI framed regulatory measures in 1973 such miscellaneous non banking companies Reserve Bank Directions 1973
438 The Reserve Bank granted exception to Peerless from the provisions of the said Directions of 1973 by an order dated 3rd December 1973
The Favourite Small Investments Limited filed a writ petition challenging the refusal of Reserve Bank to grant exemption to them from the provisions of the said 1973 Directions to granting such exemption to Peerless
In the said writ petition the RBI filed an affidavit justifying the denial of exemption to Favourite Small Investments Ltd and in the aforesaid affidavit submitted in detail the accounting procedure of Peerless including the fact that Peerless was transferring a portion of the subscriptions to the profit and loss account as income and it also certified that the said method was a permissible business method and by following the said method Peerless would be in a position to pay all contractual dues of the certificate holders at the end of the maturity period
Thus the said system of accounting which is called an actuarial system of accounting was found satisfactory by the RBI The said affidavit filed in the Favourite s case has been quoted in the Peerless case in   and the said actuarial system of accounting was not held as impermissible or against any recognized method of accounting
It was also contended on behalf of the Peerless that the interest of depositors is certainly an important consideration but the interest of the depositors is not impaired in any manner whatsoever by the method of accountancy now being followed by Peerless and in fact by all similar companies namely appropriation of a part of the subscription to the profit and loss account and meeting the working capital requirements out of the same
In respect of the above contention certain charts were also produced during the course of arguments and from such charts it was sought to establish that except for the first two years the principal amount paid by a subscriber is always covered by matching investment
Further on the date on which a deposit becomes contractually repayable there is full coverage of such liability
It was submitted on behalf of All India Peerless Field Officers Association that the said association represents about 14 lac field workers
These 14 lac persons are engaged by Peerless on the basis of individual contracts of engagements and earn their livelihood solely by collecting business for Peerless
For collecting such business Peerless pays to them commission at a contractual agreed percentage on the value of business collected
The said field officers have to meet all expenses for procuring such business such as travelling expenses boarding lodging office and administrative expenses etc
out of such commission
Field officers have to undertake long tours and have to travel into remote villages to reach the small depositors
It has been submitted that if the directions of 1987 are upheld the undertaking of Peerless will face inevitable closure and almost 439 14 lac field officers will lose their only source of livelihood and will be virtually thrown on the streets
The field officers and their families will face starvation and extreme penury in case the validity of such directions is upheld
Thus any restriction which would be prohibitive or which would result in closure of the undertaking of Peerless would be against public interest
We have heard the arguments of learned counsel for the parties
It may be made clear at the outset that questions raised in these cases regarding the validity of paragraphs 6 and 12 of the directions of 1987 cannot be determined merely by taking into consideration the working of the financial soundness of the one company alone like Peerles but the matter has to be examined in a broader perspective of all RNBCs
We have to keep in mind while deciding the controversies raised in the arguments such RNBCs which are doing the same kind of business of taking deposits and returning the same to the certificate holders after a gap of 7 to 10 years along with interest bonus etc
In the affidavit submitted before this Court on behalf of Reserve Bank of India it has been stated that prior to 1987 directions there were 747 such companies which were conducting this business under various deposit schemes
At present they could classify 392 such companies spread over across the entire country
According to the above affidavit as on 31st March 1990 in the eastern zone out of 185 companies only 35 have filed the annual returns and out of which only 30 have filed the balance sheet
Similarly out of 140 companies in the northern zone only 28 have filed annual returns and 32 have filed balance sheet
A perusal of the returns given by 51 of these companies discloses that 35 companies have a negative net worth ie their losses far exceed their share capital and reserves which necessarily means that they have not only wiped out the share capital and reserves but their liabilities are far in excess
Only 16 companies have a positive net worth including Peerless
It has been further pointed out in the affidavit that apart from Peerless the aggregate capital investment by 15 companies is Rs 158 lacs only
As against this the negative net worth of the 35 companies aggregated to Rs 36 crores
Despite large accumulated losses in some cases with meager or nominal capital these companies apart from Peerless have realised deposits to the tune of Rs 86 crores
Apart from the financial parameters most of these small companies are family concerns
Most of such companies have not designated their banks as is required under Paragraph 6 of the directions and in most of such cases amounts deposited in banks and approved securities fall much short of deposit liabilities
It has also been pointed out in the affidavit that the companies operating in these areas also at times become untraceable in that a number of show cause notices issued have been returned as ad 440 dressee not known etc
Thus we have to keep in mind the above mushroom of companies also which have set foot in this sort of business
It would also be important to note that most of the depositors in such companies belong to the rural areas and who are persons belonging to lower middle class small agriculturists and small traders pensioners etc
These companies advertise their schemes widely in beguiling terms
Through such advertisements they lure the small savings of the poor ignorant villagers through a special structure of agents special agents different kinds of organisers and so on
The agents commission for the first years subscription is very high and which offers incentive to the agents on securing a fresh business and a disincentive to collect subscriptions of subsequent years
It is a matter of common experience and knowledge that most rural folk particularly those belonging to the lower strata of society will not pay their subscriptions regularly unless somebody takes the trouble of collecting their subscription with the same enthusiasm as may be shown in enrolling the subscribers in the beginning
It is no doubt correct that these companies do tap and collect the deposits from such areas where the agents of public sector banks or public sector companies or instrumentalities of the state are unable to reach
Thus these companies mop up a large amount of money for ultimately investing in the nationalised bank or other Govt
owned corporations or companies
However the Reserve Bank considered the safety of the money of the depositors as the paramount consideration in issuing the direction of 1987
It cannot be disputed that the interest of the employees as well as the field officers and agents have also to be taken into consideration while deciding the reasonableness of the impugned directions
It may be further noted that in the Reserve Bank of India vs Peerless Company case supra this Court though came to the conclusion that the Endowment Certificate Scheme of the Peerless company was outside the Prize Chit and Money Circulation Schemes Banning Act still it was observed that it would be open to the Reserve Bank 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 though care must also be taken to protect the thousands of employees
The Court expressed grave concern with regard to the mushroom growth of financial investment companies  offering staggeringly high rates of interests to depositors leading to the suspicion whether these companies are not speculative ventures floated to attract unwary and credulous investors and capture their savings
It was clearly pointed out that if the Reserve Bank of India considers the Peerless company with 800 crores invested in Govt
securities fixed deposits with national banks etc
unsafe for depositors one wonders what they have to say about the mushroom of non banking companies which are accepting 441 deposits promising most unlikely returns and as such what action was proposed to be taken by the RBI to protect the investors
In the above background the Reserve Bank came forward with the impugned directions of 1987
Before examining the scope and effect of the impugned paragraphs 6 and 12 of the directions of 1987 it is also important to note that Reserve Bank of India which is bankers bank is a creature of Statute
It had large contingent of expert advice relating to matters affecting the economy of the entire country and nobody can doubt the bonafides of the Reserve Bank in issuing the impunged directions of 1987
The Reserve Bank plays an important role in the economy and financial affairs of India and one of its important functions is to regulate the banking system in the country
It is the duty of the Reserve bank to safeguard the economy and financial stability of the country
While examining the power conferred by Sec
58A of the on the Central Govt
to prescribe the limits upto which the manner in which and the conditions subject to which deposits may be invited or accepted by non banking companies this Court in Delhi Cloth and General Mills etc
vs Union of India etc
  observed as under Mischief was known and the regulatory measure was introduced to remedy the mischief
The conditions which can be prescribed to effectuate this purpose must a fortiori to be valid fairly and reasonably relate to checkmate the abuse of juggling with the depositorsinvestors  hard earned money by the corporate sector and to confer upon them a measure of protection namely availability of liquid assets to meet the obligation of repayment of deposit which is implicit in acceptance of deposit
Can it be said that the conditions prescribed by the Deposit Rules are so irrelevant or have no reasonable nexus to the objects sought to be achieved as to be arbitrary The answer is emphatically in the negative
Even at the cost of repetition it can be stated with confidence that the rules which prescribed conditions subject to which deposits can be invited and accepted do operate to extend a measure of protection against the notorious abuses of economic power by the corporate sector to the detriment of depositorsinvestors a segment of the society which can be appropriately described as weaker in relation to the mighty corporation
One need not go so far with Ralph Nadar in America Incorporated  to establish that political institutions may fail to arrest the control this everwidening power of corporations
And can one wish away the 442 degree of sickness in private sector companies To the extent companies develop sickness in direct proportion the controllers of such companies become healthy
In a welfare state it is the constitutional obligation of the state to protect socially and economically weaker segments of the society against the exploitation by corporations
We therefore see no merit in the submission that the conditions prescribed bear no relevance to the object or the purpose for which the power was conferred under Sec
58A on the Central Government
 The function of the Court is to see that lawful authority is not abused but not to appropriate to itself the task entrusted to that authority
It is well settled that a public body invested with statutory powers must take care not to exceed or abuse its power
It must keep within the limits of the authority committed to it
It must act in good faith and it must act reasonably
Courts are not to interfere with economic policy which is the function of experts
It is not the function of the Courts to sit in Judgment over matters of economic policy and it must necessarily be left to the expert bodies
In such matters even experts can seriously and doubtlessly differ
Courts cannot be expected to decide them without even the aid of experts
The main grievance raised on behalf of respondent companies is that if the provisions of paragraphs 6 and 12 of the directions of 1987 are complied with the companies will be left without any fund to meet their working capital
It would be impossible to run the business without a working capital and to meet even reasonable expenses incurred for payment of agents commission management expenses and other overhead expenses
During the course of hearing the counsel for the companies had relied on some charts to show the unworkability and unreasonableness of the impugned paragraphs 6 and 12 of the directions
It was also pointed out that the arguments made on behalf of the Reserve Bank overlooked the fact that in case of investments in long term schemes such as Indira Vikas Patra and Kisan Vikas Patra the companies will not be able to utilise its return from such investment before the end of the minimum period for which these schemes operate
The respondent companies will thus be left without any income during the period of operation of such schemes and cannot meet its working capital requirements
It has been submitted that the directions of 1987 really amount to prohibition of the business in a commercial sense without reasonable basis and are thus violative of article 191 g of the Constitution
In support of the above contention reliance has been placed on Mohammad Yasin vs The Town Area Committee Jalalabad and another   Premier Auto 443 mobiles Ltd and anothers vs Union of India  and on Shree Meenakshi Mills Ltd vs Union of India  It has also been contended that it is now well settled by plethora of judicial pronouncements that the restrictions on any business caused by regulations should not be more than what would be necessary in the interest of the general public and such restrictions should not overreach the scope of the objects achieved by the regulations
The contention on behalf of the Reserve Bank is that the directions have been made in public interest of safeguarding the interest of millions of depositors and the Reserve Bank is not concerned and while doing so it was rightly thought necessary by the Reserve Bank that the companies cannot be permitted to incur the expenses out of the corpus of the depositors money
The business carried on by the companies to restructure their organization by curtailing its expenses
If such middlemen or brokers are not able to earn a large profit as was done before the enforcement of the impugned directions it lies with the companies to continue or not such business when the margin of profit is curtailed
These companies want to do the business without having any stake of their own
The companies doing such business cannot be subjected to the scheme of control applied to other financial and non financial companies for the simple reason that they have no capital and their schemes are for a period much longer than three years
After the decision of the Supreme Court in Peerless case these directions of 1987 were issued after mature consideration with the help and advice of experts
Paragraph 6 of the impugned directions according to the Reserve Bank lays down provisions for security of depositors
it prescribes the mode of investment of funds collected by the companies
It cannot be disputed that while collecting deposits the companies clearly hold out to the members of the public that the moneys so collected by them shall be invested in Government securities or kept deposited with the banks and they also assure the depositors that their moneys are safe and secure
On the basis of such representations and on the strength of exaggerated and misleading advertisements these companies collect huge amounts of deposits from a large number of small poor and uninformed depositors and that too in such investment spread over a long period
The contention on behalf of the Reserve Bank of India is that in the above context these companies carry on their activities wholly with the funds provided by the public by way of deposits and hardly have any capital of their own
In these circumstances it has been urged on behalf of the Reserve Bank that the provisions made in paragraph 6 of the impugned directions are abso 444 lutely reasonable and are for ensuring repayment of deposits
It has been submitted that it is common knowledge that small depositors cannot have recourse to courts for recovering their amounts if the companies do not repay the deposits
The direction in paragraph 6 enjoins on these companies to deposit in fixed deposits with public sector banks or unencumbered approved securities or in other investments a sum which shall not at the close of business on 31st December 1987 and thereafter at the end of each half year ie 30th June and 31st December not less than the aggregate amounts of the liabilities to the depositors whether or not such amounts have become payable
Thus according to the above provision whole of the aggregate amounts of the liabilities to the depositors whether or not such amounts have become repayable is required to be deposited or invested
10  of such amount is required to be deposited in public sector banks and 70  in approved securities and 20  has been allowed to be invested by the company according to its own choice
In order to understand the rigour of the directions laid down in paragraph 6  it would be necessary to understand the scope of other directions as well
Paragraph 4 of the directions lays down that the deposit shall not be accepted for a period of less than 12 months or more than 120 months ie one years from the date of receipt of such deposits
The normal standard applied to non financial and financial companies is that they cannot accept deposits for a period of more than 36 months except housing finance company
Thus the companies before us have been permitted to conduct their schemes extending over to a long period upto 120 months
This is a special kind of concession provided to the companies of the kind before us
Paragraph 5 of the directions relates to the minimum rate of return fixed at 10  per annum for a deposit with a maturity of 10 years
It is a matter of common knowledge that in the present times even the public sector corporations and banks and other financial and non financial companies pay interest at much more higher rates ranging from 14 to 18 
Thus according to the above scheme the respondent companies and the others doing such business can easily earn a profit of 4 to 5  on their investments
In case of a request of the depositors for repayment of the deposit before maturity then the amount payable by the company by way of interest etc shall be 2  less than what could have been ordinarily paid by the company by way of interest if the deposit had run the full contractual period
However the question of repayment before maturity or after how many years will depend entirely on the terms and conditions of the contract of such deposit
Paragraph 12 of the directions of 1987 enjoins upon the company to disclose as liabilities in its books of accounts and 445 balance sheets the total amount of deposits received together with interest bonus premium or other advantage accrued or payable to the depositors
Under Clause a to the explanation to clause 3 of paragraph 6  Aggregate Amounts of Liabilities shall mean total amount of deposits received together with interest premium bonus or other advantage by whatever name called accrued on the amount of deposits according to the terms of contract
Thus the company is required to deposit or invest the aggregate amounts of its liabilities having accrued on the amount of deposits according to the terms of contract
Without going into the figures shown in the various charts it is clear that if the directions contained in paragraphs 6 and 12 of the directions of 1987 are to be carried out the companies are not left to utilise any amount out of the deposits as working capital to meet the expenses
In our view the Reserve Bank is right in taking the stand that if these companies want to do their business they should invest their own working capital and find such resources elsewhere with which the Reserve Bank has no concern
If we look at the Annual Report and Accounts of Peerles for the years 1988 1989 and 1990 it is clear that it had conducted its business following the impugned directions of 1987 and still had earned substantial profits in these years
It is clear that Peerless is a company having established as back as in 1932 and had substantial funds to invest the entire amount of deposits and had met the expenses out of its accumulated profits of the past years
This shows that the business can be run and profit can be earned even after complying with the impugned directions of 1987 issued by the Reserve Bank
It is not the concern of this court to find out as to whether actuarial method of accounting or any other method would be feasible or possible to adopt by the companies while carrying out the conditions contained in paragraphs 6 and 12 of the directions of 1987
The companies are free to adopt any mode of accounting permissible under the law but it is certain that they will have to follow the entire terms and conditions contained in the impugned directions of 1987 including those contained in paragraphs 6 and 12
It is not the function of the Court to amend and lay down some other directions and the High Court was totally wrong in doing so
The function of the Court is not to advise in matters relating to financial and economic policies for which bodies like Reserve Bank are fully competent
The Court can only strike down some or entire directions issued by the Reserve Bank in case the Court is satisfied that the directions were wholly unreasonable or violative of any provisions of the Constitution or any Statute
It would be hazardous and risky for the courts to tread an unknown path and should leave such task to the expert bodies
This court has repeatedly said that matters of economic policy ought to be left to the Government
While dealing with the validity of an order passed on September 30 1977 fixing a retail price of mustard oil not 446 exceeding Rs 10 per kilogram in exercise of powers conferred by Section 3 of the Essential Commodities Act a bench of 7 Judges of this Court in Ms Prag Ice  Oil Mills and another vs Union of India and Nav Bharat Oil Mills and another vs Union of India  observed as under We have listened to long arguments directed at showing us that producers and sellers of oil in various parts of the country will suffer so that they would give up producing or dealing in mustard oil
It was urged that this would quite naturally have its repercussions on consumers for whom mustard oil will become even more scarce than ever ultimately
We do not think that it is the function of this Court or of any Court to sit in judgment over such matters of economic policy as must necessarily be left to the Government of the day to decide
Many of them as a measure of price fixation must necessarily be are matters of prediction of ultimate results on which even experits can seriously err and doubtlessly be differ
Courts can certainly not be expected to decide them without even the aid of experts
In Shri Sitaram Sugar Company Limited and another vs Union of India  others with UP State Sugar Corporation Ltd and another vs Union of India  Others  this Court observed as under Judicial review is not concerned with matters of economic policy
The Court does not substitute its judgment for that of the legislature or its agents as to matters within the province of either
The Court does not supplant the feel of expert by its own views
When the legislature acts within the sphere of its authority and delegates power to an agent it may empower the agent to make findings of fact which are conclusive provided such findings satisfy the test of reasonableness
In all such cases judicial inquiry is confined to the question whether the findings of fact are reasonably on evidence and whether such findings are consistent with the laws of the land
In RK Garg vs Union of India  others etc
  at p 690 a Constitution Bench of this Court observed as under Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech religion etc
It has been said by no less a person than Holmes J that the legislature should be allowed some play in the joints be 447 cause it has to deal with complex problems which do not admit of solution through any doctrinaire or strait jacket formula and this is particularly true in case of legislation dealing with economic matters where having regard to the nature of the problems required to be dealt with greater play in the joints has to be allowed to the legislature
The Court should feel more inclined to give judicial defence to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved
Nowhere has this admonition been more felicitously expressed than in Morey vs Doud where Frankfurter J said in his Inimitable style In the utilities tax and economic regulation cases there are good reasons for judicial self restraint if not judicial deference to legislative Judgment
The legislature after all has the affirmative responsibility
The courts have only the power to destroy not to reconstruct
When these are added to the complexity of economic regulation the uncertainty the liability to error the bewildering conflict of the experts and the number of times the judges have been overruled by events self limitation can be seen to be the path to judicial wisdom and institutional prestige and stability
It may also be noted that it is not possible for the Court to determine as to how much percentage of deposit of first instalment should be allowed towards expenses which may consist of commission to agents office expenses etc
Even amongst the three companies viz
Peerless Timex and Favourite there is a difference in this regard
According to the Peerless 25  Timex 50  and Favorite 60  of the deposits of the first instalment would be necessary for generating the working capital for meeting the genuine expenses
Thus it would depend from company to company based on various factors such as paid up capital percentage of commission paid to the agents rate of interest paid to the depositors period of maturity for repayment office expenses and various other factors necessary to mop up working capital out of the depositors money
We cannot ignore the possibility of persons having no stake of their own starting such business and after collecting huge deposits from the investors belonging to the poor and weaker section of the society residing in rural areas and to stop such business after a few years and thus devouring the hard earned money of the small investors
It cannot be lot sight that in such kind of business the agents always take interest in finding new depositors because they get a high rate of commission out of the first instalment but they do not have same enthusiasm in respect of deposit of subsequent instalments
In these circumstances if the Reserve Bank has issued the 448 directions of 1987 to safeguard the larger interest of the public and small depositors it cannot be said that the directions are so unreasonable as to be declared constitutionally invalid
It has been vehemently contended before us on behalf of the Peerless employees and field agents that in case the impugned directions are not struck down the Peerless will have to close down its business and several thousands of employees and their family and several lakhs of field agents would be thrown on the street and left with no employment
We do not find any force in the above contention
So far as Peerless is concerned there is no possibility of its closing down such business
It has already large accumulated funds collected by making profits in the past several years
Thus it has enough working capital in order to meet the expenses
We are not impressed with the argument of Mr Somnath Chatterjee Learned Senior Advocate for the Peerless that after some years the Peerless will have to close down its business if directions contained in paragraphs 6 and 12 are to be followed
The working capital is not needed every year as it can be rotated after having invested once
If the entire amount of the subscribers is deposited or invested in the proportion of 10  in public sector banks 70  in approved securities and 20  in other investments such amounts will also start earning interest which can be added and adjusted while depositing or investing the subsequent years of deposits of the subscribers
In any case it lies with the new entrepreneurs while entering such field of business to make arrangement of their own resources for working capital and for meeting the expenses and they cannot insist in utilising the money of the depositors for this purpose
So far as the companies already in this field they must have earned profits in the past years which can be utilised as their working capital
It is important to note that the impugned directions of 1987 have been made applicable from 15th May 1987 prospectively and not retrospectively
Thus under these directions the question of depositing the entire amount of subscriptions would only apply to the deposits made after 15th May 1987
We may also observe that the impugned directions of 1987 as well as any other directions issued from time to time by the Reserve Bank relating to economic or financial policy are never so sacrosanct that the same cannot be changed
Even the financial budget for every year depends on the economic and financial policy of the Government existing at the relevant time
So far as the impugned directions are concerned if it is found in future that the same are not workable or working against the public interest the Reserve Bank is always free to change its policy and scrap or amend the directions as and when necessary
We have no doubt 449 that if in times to come the Reserve Bank feels that business of the kind run at present by Peerless and other companies in terms of the directions of 1987 are not yielding the result as envisaged by the Reserve Bank it will always be prepared to consider any new proposals which may be conducive both in the interest of the large multitude of the investors as well as the employees of such companies
Mr Shanti Bhushan learned Senior Counsel appearing on behalf of the Reserve Bank made a candid statement on behalf of the Reserve Bank that the Reserve Bank would always be prepared to consider any new proposal which would observe the public interest
In the result I set aside the orders of the High Court and allow the appeals arising out SLP Nos
6930 30 A of 1991 7140 of 1991 and 3676 of 1991 filed by the Reserve Bank of India and dismiss the wirt petition No 677 of 1991
No order as to costs
KRAMASWAMY J While respectfully agreeing with my learned brother since the issues bear far reaching seminal importance I propose to express my views as well
This Court in Reserve Bank of India etc
vs Peerless General Finance and Investment Co Ltd  Ors
  for short first Peerless case  while holding that does not attract Recurring Deposits Schemes pointed out that the schemes harshly operate against the poor sections of the society who require security and protection urgent action appeared to be called for and was imperative to protect the public and emphasized to evolve fool proof scheme to prevent fraud being played upon persons not conversant with practices of the financial enterprises who pose themselves as benefactors of the people
In pursuance thereof the appellant Reserve Bank of India for short RBI  issued Residuary Non Banking Companies Reserve Bank Directions 1987 for short the Directions 
The short shift with avid eye into the relevant provisions of the 2 of 1934 for short the Act  and the directions would enable us to come to grips with the scope of the scheme of the directions its purpose and operation
Chapter IIIB of the Act deals with the power of RBI to regulate non banking institutions receiving deposits
Section 45 1 bb defines deposit includes and shall be deemed always to have included any receipt or money by way of deposit or loan or in any other form but does not include  exceptions are not relevant and hence are omitted
Section 451 c defines financial institution  to mean any non banking institution which carries on its business or part of its business in any of the following activities clauses i to v are omitted clause vi collect 450 ing for any purpose of any scheme or arrangement by whatever name called monies in lump sum or otherwise by way of subscription or in any other manner by 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 persons but does not include the exclusions are not relevant and hence omitted
Section 45J empowers that RBI may if it considers necessary in the public interest so to do by general or special order a regulate or prohibit the issue by any non banking institution of any prospectus or advertisement soliciting deposits of money from the public and b specify the conditions subject to which any such prospectus or advertisement if not prohibited may be issued
Section 45K empowers the RBI to collect information from non banking institution as to deposit and to give directions that every non banking institution shall furnish to the Bank in such form at such intervals and within such time such statements information or particulars relating to or connected with deposits received by the non banking institution as may be specified by RBI by general or special order including the rates of interest and other terms and conditions on which they are received
Under sub section 3 thereof the RBI is entitled to issue in the public interest directions to non banking institution in respect of any matter 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
The use of the adjective any  matter relating to or connected with the receipt of deposits is wide and comprehensive to empower the RBI to issue directions in connection therewith or relating to the receipt of deposits
But exercise of power is hedged with and should be in the public interest
 Section 45L provides that if the RBI is satisfied that for the purpose of enabling it to regulate the credit system of the country to its advantage it is necessary so to do it may give to such institutions either generally or to any such institution in particular directions relating to the conduct of business by them or by it as financial institution or institutions including furnishing of information of particulars relating to paid up capital reserves or other liabilities the investments whether in the Government securities or otherwise the persons to whom and the purposes and periods for which finance is provided the terms and conditions including the rates of interest on which it is provided
Section 45Q provides that the provisions of this chapter shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law
The directions became operative from May 15 1987
They would apply to every Residuary Non Banking Company for short RNBC  451 which receive any deposit scheme in lump sum or in instalment by way of contribution or subscription or by sale of units of certificates or other instruments or in any other manner vide Clause II of the definition
Clause IIIA defines deposits as defined in s451 bb of the Act
Paragraph 4 regulates receipt of deposits for a period not less than 12 months and not more than 120 months from the first day of the receipt of the deposit
Paragraph 5 prescribes minimum rate of return of 10 per cent per annum to be compounded annually on the amount deposited
The proviso empowers RNBC at the request of the depositor to make repayment of the deposit after the expiry of a period of one year from the date of the deposit but before the expiry of the period the deposit with two per cent reduced rate of interest from 10  interest
Paragraph 6 the heart of the directions consists of three sub paragraphs with explanations
The marginal note expresses security for depositors
Sub paragraph 1 thereof provides that on and from May 15 1987 every RNBC shall deposit and keep deposited in fixed deposits with public sector banks or invest and keep invested in unencumbered approved securities such securities being valued at their market value for the time being or in other investments which in the opinion of the company are safe a sum which shall not at the close of business on 31 st December 1987 and thereafter at the end of each half year that is 30th June and 31st December be less than the aggregate amounts of the liabilities to the depositors whether or not such amounts have become payable
The proviso specifies that the sum so deposited or invested a not less than 10 per cent shall be in fixed deposits with any of the public sector banks b not less than 70 per cent shall be in approved securities and c not more than 20 per cent or 10 times the net owned funds of the company whichever amount is less shall be in other investments
Provided that such investments shall be with the approval of the Board of Directors of the company the explanation Net Owned funds shall mean the aggregate of the paid up capital and free reserves as appearing in the latest audited balance sheet of the company as reduced by the amount of accumulated balance of loss deferred revenue expenditure and other intangible assets if any as disclosed in the said balance sheet
Sub paragraph 2 enjoins toe RNBC to entrust to one of the public sector banks designated in that behalf
Deposits and securities referred to in clauses a and b of the proviso to sub paragraph 1 to be held by such designated bank is for the benefit of the depositors
Such securities and deposits shall not be withdrawn by the RNBC or otherwise dealt with except for repayment to the depositors
Sub paragraph 3 obligates it to furnish to the RBI within 30 days from the close of business on 31st December 1987 and thereafter at the end of each half year ie as on 30th June and 31st December a certificate from its auditors being member of institute of Chartered Accountants to the effect 452 that the amounts deposited in fixed deposits and the investment made are not less than the aggregate amounts of liabilities to the depositors as on 30th June and 31st December of that year
Explanation thereto makes explicit what the aggregate amount of liabilities approved securities and public sector banks and unencumbered approved securities are meant to be the details of which are not necessary for the purpose of this case
Paragraph 7 abolishes the power of the RNBC of forfeiture of deposits paragraph 8 prescribes particulars to be mentioned in the form soliciting deposits paragraph 9 enjoins issuance of the receipts to the depositors and paragraph 10 obligates to maintain the register with particulars of depositors mentioned therein
Paragraph II enjoins its Board of Directors to furnish the information in their report as envisaged therein
Paragraph 12 which is also material for the purpose of this case provides that every RNBC shall disclose as liabilities in its books of accounts and balance sheets the total amount of deposits received together with interest bonus premium or other advantage accrued or payable to the depositors
Paragraph 13 enjoins to supply to RBI copies of the balance sheets and accounts together with Directors report
Paragraph 14 obligates the company to submit returns to the RBI in the manner envisaged thereunder
RNBC has to submit balance sheet returns etc
to the department of the Financial Companies as per paragraph 15
Paragraph 16 obligates RNBC to comply with the requirement of the non banking financial companies and miscellaneous non banking companies Advertisement Rules 1977 etc
and actual rate of interest etc
to the depositor
Paragraph 17 applies to the prospective RNBC to furnish information in Schedule C Paragraph 18 accords transitory power and paragraph 19 empowers the RBI if it considers necessary to avoid any hardship or for any other just and sufficient reasons to grant extensions of time to comply with or exempt any company or class of companies from all or any of the provisions of the directions either generally or for any specified period subject to such conditions as the RBI may impose and paragraph 20 excludes the applicability of paragraph 19 of the Non Banking Financial Companies Reserve Bank Directions 1977
The High Court declared paragraphs 6 and 12 to be ultra vires of article 191g and 14 of the Constitution holding that though the directions do not expressly prohibit the business of receiving any deposit under any scheme or arrangement in lump sum or in instalment by way of contribution or subscription by RNBC in effect the operation of the directions inhibit the existing business and prohibits the future companies to come into being
As seen the public purpose of the directions is to secure for the depositors return of the amounts payable at maturity together with interest bonus premium or any other advantage accrued or payable to the 453 depositors
To achieve that object every RNBC is enjoined to deposit and keep deposited in fixed deposit and invest and keep invested in unencumbered approved securities a sum which shall not at the close of each half year be less than the aggregate amount of the liability to the depositors whether or not such amount has become payable
The object thereby is to prohibit deployment of funds by RNBC in any other manner which would work detrimental to the interest of the depositors
The question emerges whether paragraph 6 and 12 are ultra vires of Articles 191g and 14 of the Constitution
Article 191g provides fundamental rights to all citizens to carry on any occupation trade or business
6 thereof empowers the State to make any law imposing in the interest of the general public reasonable restrictions on the exercise of the said rights
Wherever a statute is challenged as violative of the fundamental rights its real effect or operation on the fundamental rights is of primary importance
It is the duty of the court to be watchful to protect the constitutional rights of a citizen as against any encroachment gradually or stealthily thereon
When a law has imposed restrictions on the fundamental rights what the court has to examine is the substance of the legislation without being beguiled by the mere appearance of the legislation
The Legislature cannot disobey the constitutional mandate by employing an indirect method
The court must consider not merely the purpose of the law but also the means how it is sought to be secured or how it is to be administered
The object of the legislation is not conclusive as to the validity of the legislation
This does not mean the constitutionality of the law shall be determined with reference to the manner in which it has actually been administered or operated or probably been administered or operated by those who are charged with its implementation
The court cannot question the wisdom the need or desirability of the regulation
The state can regulate the exercise of the fundamental right to save the public from a substantive evil
The existence of the evil as well as the means adopted to check it are the matters for the legislative judgment
But the court is entitled to consider whether the degree and mode of the regulation whether is in excess of the requirement or is imposed in any arbitrary manner
The court has to see whether the measure adopted is relevant or appropriate to the power exercised by the authority or whether over stepped the limits of social legislation
Smaller inroads may lead to larger inroads and ultimately result in total prohibition by indirect method
If it directly transgresses or substantially and inevitably effects the fundamental right it becomes unconstitutional but not where the impact is only remotely possibly or incidental
The court must lift the veil of the form and appearance to discover the true character and the nature of the legislation and every endeavor should be made to have the efficacy of fundamental right maintained and the legislature is 454 not invested with unbounded power
The court has therefore always to guard against the gradual encroachments and strike down a restriction as soon as it reaches that magnitude of total annihilation of the right
However there is presumption of constitutionality of every statute and its validity is not to be determined by artificial standards
The court has to examine with some strictness the substance of the legislation to find what actually and really the legislature has done
The court would not be over persuaded by the mere presence of the legislation
In adjudging the reasonableness of the law the court will necessarily ask the question whether the measure or scheme is just fair reasonable and appropriate or is it unreasonable unnecessary and arbitrary interferes with the exercise of the right guaranteed in Part III of the Constitution
Once it is established that the statute is prima facie unconstitutional the state has to establish that the restrictions imposed are reasonable and the objective test which the court to employ is whether the restriction bears reasonable relation to the authorized purpose or an arbitrary encroachment under the garb of any of the exceptions envisaged in Part III
The reasonableness is to the necessity to impose restriction the means adopted to secure that end as well as the procedure to be adopted to that end
The court has to maintain delicate balance between the public interest envisaged in the impugned provision and the individual s right taking into account the nature of his right said to be infringed the underlying purpose of the impugned restriction the extent and urgency of the evil sought to be remedied thereby the disproportion of the restriction imposed the prevailing conditions at the time the surrounding circumstances the larger public interest which the law seeks to achieve and all other relevant factors germane for the purpose
All these factors should enter into the zone of consideration to find the reasonableness of the impugned restriction
The court weighs in each case which of the two conflicting public or private interest demands greater protection and if it finds that the restriction imposed is appropriate fair and reasonable it would uphold the restriction
The court would not uphold a restriction which is not germane to achieve the purpose of the statute or is arbitrary or out of its limits
This Court in Joseph Kuruvilla Vellukunnel vs Reserve Bank of India  Ors
1962 Suppl
3 SCR 632 held that the RBI is a bankers  bank and lender of the last resort   Its objective is to ensure monetary stability in India and to operate regulate the credit system of the country
It 455 has therefore to perform a delicate balance between the need to preserve and maintain the credit structure of the country by strengthening the rule as well as apparent credit worthiness of the banks operating in the country and the interest of the depositors
In under developed country like ours where majority population are illiterate and poor and are not conversant with banking operations and in under developed money and capital market with mixed economy the constitution charges the state to prevent exploitation and so the RBI would play both promotional and regulatory roles
Thus the RBI occupies place of pre eminence   to ensure monetary discipline and to regulate the economy or the credit system of the country as an expert body
It also advices the Government in public finance and monetary regulations
The banks or non banking institutions shall have to regulate their operations in accordance with not only as per the provisions of the Act but also the rules and directions or instructions issued by the RBI in exercise of the power thereunder
Chapter 3B expressly deals with regulations of deposit and finance received by the RNBCs
The directions therefore are statutory regulations
In State of UP vs Babu Ram   this Court held that rules made under a statute must be treated for all purposes of construction or obligations exactly as if they were in that Act and are to the same effect as if they contained in the Act and are to be judicially noticed for all purposes of construction or obligations
The statutory rules cannot be described or equated with administrative directions
In DVK Prasada Rao vs Govt
of AP AIR 1984 AP 75 the same view was laid
Therefore the directions are incorporated and become part of the Act itself
They must be governed by the same principles as the statute itself
The statutory presumption that the legislature inserted every part thereof for a purpose to and the legislative intention should be given effect to would be applicable to the impugned directions
The RBI issued the directions to regulate the operations of the RNBCs to safeguard the interest of the depositors
Payment of interest bonus premium or other advantage in whatever name it may be called is reward for waiting or parting with liquidity
It is paid because of positive time preference one rupee today is preferred to one rupee tomorrowon the part of the depositor
Therefore the directions avowed to preserve the right of the depositors to receive back the amount deposited with the contracted rate of interest it aims to prevent depletion of the deposits collected from the weaker segments of the society and also tends to effect free flow of the business of the RNBCs
who would desire to operate in their own way
The question therefore emerges whether the directions in paras 5 and 12 violate articles 14 and 191g of the Constitution
456 The solidarity of political freedom hinges upon socio economic democracy
The right to development is one of the most important facets of basic human rights
The right to self interest is inherent in right to life
Mahatma Gandhiji the Father of the Nation said that Every human being has a right to live and therefore to find the wherewithal to feed himself and where necessary to clothe and house himself  
Article 25 of the Universal Declaration of Human Rights provides that everyone has a right to a standard of living adequate for the health and well being of himself and of his family including food clothing housing and medical care   Right to life includes the right to live with basic human dignity with necessities of life such as nutrition clothing food shelter over the head facilities for cultural and socio economic well being of every individual
article 21 protects right to life
It guarantees and derives therefrom the minimum of the needs of existence including better tomorrow
Poverty is not always an economic problem alone
Very often it is a social as well as human problem
An agriculturist an industrial worker the daily wage earner rickshaw puller and small self employed teacher artisan etc
may have an earning but may be prone to spend hisher entire earnings apart from on daily necessities of life on socio religious occasions fairs festivals etc
The urge for better tomorrow and prosperous future the clamour for freedom from want of any kind and social security make the vulnerable segments of the society to sacrifice today s comforts to save for better tomorrow
The habit of saving has an educative value for thrift
It endeavors to bring an attitudinal change in life
It enables individuals to assess future specific needs and to build up a financial provision for the purpose
The habit of saving becomes a way of life and harnesses the meagre resources to build up better future
During the days of rising prices small savings serve as instrument to mop up the extra purchasing power
In addition to wage a war against poverty waste unwise spending hoarding and other activities habit of saving also enables family budgeting and postponing expenditure which can be deffered in favour of better utilisation in future
To strengthen the urge for thrift and streamline the social security the disadvantaged need freedom from exploitation and Art46 of the constitution enjoins the State to protect the poor from all forms of exploitation and social injustice
Investment agencies or commercial banks are intermediaries between savers and investors
They embark upon deposit mobilisation campaign to mop up the limited resources
Commercial banks or financial investment agencies be it public sector or private sector are vying with one another to scale new heights in deposit growth each year devising 457 different deposit schemes to suit the individual needs of the depositors or savers
Mushroom growth of non banking agencies put afloat diverse schemes with alluring offers of staggering high rate of interest and other catchy advantages which would generate suspicion of the bona fides of the offer
But gullible depositors are lured to make deposits
It is not uncommon that after collecting fabulous deposits some unscrupulous people surreptitiously close the company and decamp with the collections keeping the depositors at bay
Therefore the need to regulate the depositssubscriptions in particular in private sector became imperative to prevent exploitation or mismanagement as social justice stratagem
The directions are therefore a social control measure over the RNBCs in matters connected with the operation of the schemes or incidental thereto
The direction to investment in the channelised schemes at the given percentage in clauses a and b of proviso to para 61 was intended to deposit or keep deposited the collections in fixed deposit in the public sector banks or invest or keep invested in unencumbered approved securities so as to ensure safety steady growth and due payment to the subscribers at maturity of the principal amount and the interest bonus premium or other advantage accrued thereon
The amounts deposited shall not be less than the total aggregate amounts of liabilities to the subscribers
The deposits or securities shall not be withdrawn or otherwise be dealt with except for a repayment to the subscribers
It should always be shown to be a liability till date of the repayment
This court in Hatisingh Mfg Co Ltd  Anr
vs Union of India  Ors
  held that freedom to carry on trade or business is not an absolute one
In the interest of the general public the law may impose restrictions on the freedom of the citizen to start or carry on his business whether an impugned provision imposing a fetter on the exercise of the fundamental right guaranteed by article 191g amounts to a reasonable restriction imposed in the interest of general public must be adjudged not in the background of any theoretical standard or pre determinate patterns but in the light of the nature and the incidence of the right the interest of the general public sought to be secured by imposing restrictions and the reasonableness of the quality and the extent of the fetters imposed by the directions
The credit worthiness of RNBCs
undoubtedly would be sensitive
It thrives upon the confidence of the public on the honesty of its management and its reputation of solvency
The directions intended to promote freedom   and facility   which are required to be regulated in the interest of all concerned
The directions as a part of the scheme of the Act would be protected from the attack
Vide Latafat Ali Khan  Ors
vs State of UP 458 The RNBC is required to conduct its business activities in the interest of the depositors or subscribers who are unorganised ignorant gullible and ignorant of the banking operations
If however the acts of RNBC is detrimental to the interest of the depositors etc
the RBI has power in Chapter 3B to issue directions and the RNBC is bound to comply with the directions and non compliance thereof visits with penal action
Admittedly except Peerless General Insurance the other companies do not have either paid up capital or reserve fund worth the name
Peerless was established in the year 1932 and over the years it built up reserve fund
RNBCs are carrying their business by crediting the entire first year s collections as a capital receipt under actuarial accounting method
In the affidavit of Sri SS Karmic the Chief Officer of the RBI filed on August 13 1991 it was stated that prior to the directions 747 RNBCs were doing the business
As on that date only 392 RNBCs were notified to be existing
Out of them 178 are in West Bengal 15 in Assam 26 in Orissa 6 in Manipur and Meghalaya 26 in Punjab 64 in UP 22 in Delhi etc
As on March 31 1990 out of 185 35 RNBCs
alone submitted annual returns and out of them only 30 have filed their balance sheets
28 RNBCs
in the northern region filed their annual returns and 23 filed their balance sheets with incomplete date
35 of them have negative net worth loss for exceeding their share capital and reserve
Apart from Peerless the aggregate capital investment of 15 companies accounted to Rs 158 lacs
The negative net worth of the 35 companies referred to above would aggregate to Rs36 crores
They raised apart from Peerless deposits to the tune of Rs 86 crores
Many of them have not even designated their banks as required under para 6 of the direction
The amount invested in bank deposits and approved securities fell much short of their deposit liabilities
Verona Commercial Credit and Investment Company one of the respondents have accumulated losses to the tune of Rs 38 crores
As per balance sheet their assets are inadequate to meet the liability
Favourite Small Scale Investment one of the respondents as on December 12 1989 even their provisional balance sheet shows that total liability towards depositors is Rs 4462 crores while its investment in banks and Government security is only Rs 13 crores
The cash on hand was Rs 174 crores
Rs8 crores were shown to be loans and advances
The accumulated losses are Rs2219 crores as against total share capital and reserve of Rs 2073 lacs
It is thus clear on its face that while total liabilities are Rs 4909 crores the assets including doubtful loans and advances aggregate to Rs 26 crores
An inspection into the affairs of the said company conducted in February 1990 disclosed that upto the end of 1989 the deposit liabilities including interest would be in the region of 459 over Rs 132 crores
The difference between the inspection and the balance sheet would be due to actuarial principle
It had committed default to pay to its depositors to the tune of Rs 54 crores which is a gross under estimate
Sri Somnath Chatterjee the learned Senior Counsel for the Peerless and adopted by other counsel contended that paragraphs 6 and 12 are totally unworkable
Its compliance would jeopardise not only the existing companies but also the very interest of the depositors and large workmen
No new company would be set up
The direction given in the first Peerless case was to keep in view the interest of the workmen as well in effect it was given a go bye
At least 25 of collections would be left over as working capital of the company to carry on its business in a manner indicated by the impugned judgment so that no depositor would lose his money and no workmen would lose his livelihood and it will be in consonance with public interest
Shri GL Sanghi the learned Senior Counsel for Timex contended that 50 of collection would be necessary to comply with the impugned directions and another company pleaded for 40
Further contention of Shri Chatterji was that the actuarial accounting neither violates any law nor objected to by the Income tax Department
Crediting the first year s subscription in the accounts as capital receipt would generate company s working capital for its successful business by meeting the expenditure towards establishment the commission and a part of profits
Forfeiture clause was already dated before the directions were issued
Interest at 10 with annual compounding would be reasonable return to the subscribers which is being ensured to the depositors
The directions issued by the High Court subject to the above modifications would subverse the above purpose
Paras 6 and 12 otherwise are arbitrary and prohibitive violating their fundamental right to do business assured by articles 191g and 14
Sri Harish Salve resisted the contentions with ability
Para 12 is myocardium and para 6  is the heart of the directions without which the directions would be purified corpse
On the respondents own showing for the first two years by actuarial accounting the liabilities as against deposits are inadequate
The regulation intends to preserve the corpus of the deposits and the interest payable thereon as on date to be a tangible and unencumbered asset at all times though not repayable
Indisputably the depositorssubscribers stand as unsecured creditors
Undoubtedly every measure cannot be viewed or interpreted in the event of catastrophe overtaking the company
The catchy and alluring but beguiled terms of offer attract the vulnerable segments of the society to subscribe and keep subscribing the small savings for better tomorrow
460 But many a time by the date of maturity their hopes are belied and aspirations are frustrated or dashed to ground
They remain to be helpless spectators with all disabilities to recover the amounts
Pathetic financial position of some of the companies enumerated herein before would amply demonstrate the agony to which the poor subscribers would be subjected to
The fixed deposits and unencumbered securities as per Clauses a and b of the proviso to paragraph 61 would be 80 of the collections of the year of subscription and Shri Chatterji contends to reduce it to 75 and to allow free play to use the residue in their own way
The difference is only 5 and others at vagary
The objects of the direction are to preserve the ability of the RNBC to pay back to the subscribersdepositors at any given time safety of the subscribers  money and his right to unencumbered repayment are thus of paramount public interest and the directions aimed to protect them
The directions cannot and would not be adjudged to be ultra vires of arbitrary by reason of successful financial management of an individual company
An over all view of the working system of the scheme is relevant and germane
The obligation in paragraph 12 of periodical disclosure in the accounts of a company of the deposits together with the interest accrued thereon whether or not payable but admittedly due as a liability is to monitor the discipline of the operation of the schemes and any infraction would be dealt with as per law
The certificate by a qualified Chartered Accountant is to vouchsafe the correctness and authenticity of accounts and would and should adhere to the statutory compliance
The settled accounting practice is that a loan or deposit received from a creditor has to be shown as a liability together with accrued interest whether due or deferred
The actuarial accounting applies to revenues and costs to which the concept of the going concern   can be adopted
Therefore in providing the costs of the company it can set apart its costs on the basis that liability is created for interest bonus etc
payable in foreseeable future
Undoubtedly the actuarial principle applied by the LIC or the gratuity schemes are linked with life of the assured or the premature death before retirement of an employee but RNBC in its contract does not undertake any such risk
The deposit is a capital receipt but not a revenue receipt and its full value shall be shown in the account books of balance sheet as liability of the company
It cannot be credited to the profit and loss account
Para II of Schedule VI of the requires that the amount shown in the profit and loss account should be confined to the income and expenditure of the company
Para 12 of the directions is thus in consonance with the 
Moreover in its advertisement and the application forms 461 the RNBC expressly hold out to the public that their monies are safe with the bank and in the Government securities
Paragraph 61 of the directions only mandates compliance of the promise held out by an RNBC for repayment at maturity
Sub para 3 of para 6 keeps the deposits unencumbered and to be utilised by the company only for repayment
In other words paragraph 6 only elongates the contract in the public interest to safeguard the interest of the vulnerable sections of the depositors
The RBI cannot be expected to constantly monitor the working of the RNBC in its day to day function
The actuarial basis cannot be adopted by the RNBCs
and the liability must always be reflected in its balance sheet at its full value
Compliance of the direction in para 12 dehors any method of accountancy adopted by a company intended to discipline its operations
No one can have fundamental right to do any unregulated business with the subscribersdepositors  money
Even the banks or the financial companies are regulated by ceiling on public deposits fixing nexus between deposits and net worth of the company at the ratio of 31 ie 25 of the capital net worth
No one would legitimately be expected to get immediate profits or dividend without capital investment
The effect of the clause a and b of the provision to paragraph 61 of the direction no doubt freezes the right to profit for a short time and fastens an incidental and consequential obligation to mop up paid up capital or investment towards establishment and commission charges to tide over teething trouble
But that is no ground to say that it is impossible for compliance nor could it be said that the directions are palpably arbitrary or unreasonable
Anyone may venture to do business without any stake of his own but is subject to the regulations
A new company without any paid up capital no doubtcannot be expected to come into existence nor would operate its business at initial existence with profits
Clause c of the provision to paragraph 61 of the directions gives freedom on leeway to invest or rotate not more than 20 per cent of collections etc
in any profitable manner at its choice as a prudent businessman to generate its resources to tide over the teething troubles till it is put on rail to receive succor to its existence without inhibiting the company s capacity to mop up small savings and the directions do not control its operation
The only rider is the approval of the Board of Directors which is inherent
Absence of imposition of any limit on quantum of deposit with reference to paid up capital or reserve fund like non banking financial companies etc
is a pointer in this regard
Thus there is a reasonable nexus between the regulation and the public purpose namely security to the depositors  money and the right to repayment without any impediment which undoubtedly is in the public interest
462 Looking from operational pragmatism the restrictions though apparently appears to be harsh in form in its systematic working it would inculcate discipline in the business management subserve public confidence in the ability of the company to honour the contractual liability and assure due repayment at maturity of the amount deposited together with interest etc without any impediment
In other words the restrictions in paragraph 6 of the directions intended to elongate the twin purposes vizhabit of thrift among the needy without unduly jeopardising the interest of the employees of the companies and the RNBCs working system itself in addition to safety and due payment of depositors  money
True as contended by Shri Chatterji that there arises corresponding obligation to pay higher amount of commission to its agents and the commitment should by kept performed and the confidence enthused in the agents
But it is the look out of the businessman
The absence of ceiling on the rate of commission would give choice between the company and its agents to a contract in this regard and has freedom to manage its business
The RNBCs
are free to incur such expenses and organize their business as they desire including payment of commission as they think expedient
But the subscribersdepositors liability under no circumstances would be in jeopardy and the directions were designed to ensure that the interest of the subscribersdepositors is secured at all times prescribing investment of an equal sum to the total liability to the subscribersdepositors
Paragraph 12 is only a bridge between the depositors and the promise held out and the contract executed in furtherance thereof as a monitoring myocardium to keep the heart in paragraph 6 functioning without any hiatus
It is settled law that regulation includes total prohibition in a given case where the mischief to be remedied warrants total prohibition
Vide Narendra Kumar vs Union of India  But the directions do not do that but act as a siphon between the subscriberdepositor and the business itself
Therefore they are neither palpably arbitrary nor unjust not unfair
The mechanism evolved in the directions is fool proof as directed by this court in first Peerles case to secure the interest of the depositors as well is capable to monitor the business management of every RNBC
It also thereby protects interest of the employeesfield staffcommission agent etc
as on permanent basis overcoming initial convulsions
It was intended in the best possible manner to subserve the interest of all without putting any prohibition in the ability of a company to raise the deposit even the absence of any adequate paid up capital or reserve fund or such pre commitment of the owner to secure such deposits
Thus the directions impose only partial control in the public interest of the depositors
The deposits invested or keep invested qua the com 463 pany always remained its fund till date of payment at maturity or premature withdrawal in terms of the contract
The effect of the impugned judgment of the Calcutta High Court namely redefinition of the aggregate liabilities as contractual liabilities due and payable would have the effect of requiring the RNBCs
to deposit an amount equal to the sum payable only in the year of maturity allowing free play to the RNBCs
to use the subscriptionsdeposits in its own manner during the entire earlier period jeopardise the security of the subscribersdepositors and are self defeating
The sagging mismanagement prefaced hereinabove would be perpetrated and the depositor was always at the mercy of the company with all disabilities killing the very goose namely the thrust to save for prosperous future or to tide over future needs
It is well settled that the court is not a Tribunal from the crudities and inequities of complicated experimental economic legislation
The discretion in evolving an economic measures rests with the policy makers and not with the judiciary
Indian social order is beset with social and economic inequalities and of status and in our socialist secular democratic Republic inequality is an anathema to social and economic justice
The constitution of India charges the state to reduce inequalities and ensure decent standard of life and economic equality
The Act assigns the power to the RBI to regulate monitory system and the experimentation of the economic legislation can best be left to the executive unless it is found to be unrealistic or manifestly arbitrary
Even if a law is found wanting on trial it is better that its defects should be demonstrated and removed than that the law should be aborted by judicial fiat
Such an assertion of judicial power deflects responsibilities from those on whom a democratic society ultimately rests
The court has to see whether the scheme measure or regulation adopted is relevant or appropriate to the power exercised by the authority
Prejudice to the interest of depositors is a relevant factor
Mismanagement or inability to pay the accrued liabilities are evils sought to be remedied
The directions designed to preserve the right of the depositors and the ability of RNBC to pay back the contracted liability
It also intended to prevent mismanagement of the deposits collected from vulnerable social segments who have no knowledge of banking operations or credit system and repose unfounded blind faith on the company with fond hope of its ability to pay back the contracted amount
Thus the directions maintain the thrift for saving and streamline and strengthen the monetary operations of RNBCs
The problems of Government are practical and do require rough accommodation
Illogical it may be and unscientific it may seem to be left to its working and if need be can be remedied by the RBI by 464 pragmatic adjustment that may be called for by particular circumstances
The impugned directions may at first blush seem unjust or arbitrary but when broached in pragmatic perspective the mist is cleared and that the experimental economic measure is manifested to be free from the taints of unconstitutionality
Para 19 of the directions empowers the RBI to extend time for compliance or to exempt a particular company or a class thereof from all or any of the provisions either generally or for a specified period subject to such conditions as may be imposed
Power to exempt would include the power to be exercised from time to time as exigencies warrant
An individual company or the class thereof has to place necessary and relevant material facts before the RBI of the hardship and the need for relief
A criticism of arbitrariness or unreasonableness may not be ground to undo what was conceived best in the public interest
What is best is not always discernible
The wisdom of any choice may be disputed or condemned
Mere errors of Government are not subject to judicial review
The legislative remedy may be ineffective to mitigate the evil or fail to achieve its purpose but it is the price to be paid for the trial and error inherent in the economic legislative efforts to grapple with obstinate social issues
It is proper for interference in judicial review only when the directions regulations or restrictions are palpably arbitrary demonstrably irrelevant or disriminatory
Exercise of power then can be declared to be void under article 13 of the Constitution
So long as the exercise of power is broadly within the zone of reasonableness the court would not substitute its judgment for that of legislature or its agent as to matters within their prudence and power
The court does not supplement the feel of the experts by its own values
It is settled law that so long as the power is traceable to the statute mere omission to recite the provision does not denude the power of the legislature or rule making authority to make the regulations nor considered without authority of law
Section 114 h of the Evidence Act draws a statutory presumption that official acts are regularly performed and reached satisfactorily on consideration of relevant facts
The absence of reiteration of objective satisfaction in the preamble as of one under s45L does not denude the powers the RBI admittedly has under s45L to justify the actions
Though s45L was neither expressly stated nor mentioned in the Preamble of the directions of the required recitation of satisfaction of objective facts to issue the directions from the facts and circumstances it is demonstrated that the RBI had such satisfaction in its consideration of its power under s45L when the directions were issued 
Even otherwise s45K 3 itself is sufficient to uphold the directions
465 The impugned directions are thus within the power of the RBI to provide tardy stable identifiable and monitorable method of operations by each RNBC and its compliance of the directions
This will ensure security to the depositors at all times and also make the accounts of the company accurate accountable and easy to monitor the working system of the company itself and continuance of its workmen
The directions in paragraphs 6 and 12 are just fair and reasonable not only to the depositors but in the long run to the very existence of the company and its continued business itself
Therefore they are legal valid and constitutionally permissible
The Writ Petition is dismissed and the appeals are allowed
The Writ Petitions filed in the High Court stand dismissed
No costs in this Court
GN Petition dismissed Appeals allowed


Summary:
The Government of Kerala issued a Notification dated 1891974 under Section 1 5 of the extending the provisions of the Act to six kinds of establishments viz Hotels Restaurants Shops Road Transport Motor Establishments Cinemas and Newspaper Establishments
The appellant Company carrying on the business of clearing and forwarding at the port of Cochin received notice for payment of its contribution under the Act
Denying its liability to pay it filed an application before the Employees  Insurance Court under Section 75 of the Act contending that the Notification was not applicable to it because its establishment was not a shop but the same was dismissed
On appeal a Division Bench of the High Court held that the establishment of the appellant falls within the purview of the term shop 
In appeals to this Court it was contended on behalf of the appellant that 1 though shop  would take within it other establishments like hotels or restaurants yet they have come to be specifically mentioned
In view of that enumeration of other establishment in contradistinction to shops the 910 word shop  must be held to relate to a place where commercial activity of buying and selling merchandise takes place otherwise the enumeration of other establishment becomes meaningless 2 in view of the fact that the notification specifically enumerates the other establishments the intention has been clearly brought out not to give a wider meaning of the term shop  as otherwise the term shop  itself would be enough to cover other establishments like hotels restaurants cinema etc
From this point of view the activity carried on by the appellant merely processing the document at the customs clearing house without rendering any service to the customers at the appellant s office of establishment cannot be said to fall within the meaning of shop 
Dismissing the appeals this Court HELD Per Sharma J
In view of the consistent interpretation of the notification which has been followed in the country the question should not be reopened for fresh consideration
912 B Per Mohan J For Himself and Venkatachala J Concurring 1
The Employee s State Insurance Act is an Act to provide certain benefits to employees in case of sickness maternity and employment injury and makes provision for certain other matters in relation thereto
Under Section 14 in the first instance it is made applicable to all factories
But the Act envisages the extension of benefit to the employees in other establishments or class of establishments industrial commercial agricultural or otherwise
The extension of benefit is to be done by means of a notification by the Appropriate Government
Thus the benefits conferred by the Act cover a large area of employees than what the Factories Act and the akin legislations intended
The conclusion is inescapable that it is a welfare legislation
The endeavour of Court should be to place a liberal construction so as to promote its object
The object is to envelop as many establishments as possible without leaving any room for doubt
That is precisely what the Notification intends to do
915D EF920 A 2
The Notification catalogues six establishments one of which is shop 
Merely because other establishments which are akin to shop are enumerated it does not in any manner oblige the Court to give a narrow 911 meaning to the word shop  nor does it any way dilute the meaning of shop 
The appellant is carrying on stevedoring clearing and forwarding operations
Clearing the documents even it be in the custom house is necessary for the export or import of goods
These services form part of the carriers job
It cannot be gainsaid that the appellant is rendering service to cater the needs of exporters and importers and others who want to carry the goods further
Therefore it is a shop carrying on a systematic economic or a commercial activity
This would be enough to bring the appellant without specifically enumerating the specific activities carried on by the appellant
913H 919H 920A B Hindu Jea Band Jaipur
vs Regional Director Employees  State Insurance Corporation Jaipur  and Ms International Ore  Fertilizers India Pvt Ltd vs Employees  State Insurance Corporation   relied on
Wharton s Law Lexicon 14th Edn 929 and Words and Phrases Legally defined 2nd Edn 73 referred to