IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN WEDNESDAY, THE 18TH NOVEMBER 2009 / 27TH KARTHIKA 1931 WA.No. 540 of 2007() -------------------- AGAINST THE JUDGEMENT IN WPC.12378/2006 Dated 14/02/2007 .................... APPELLANT/PETITIONER ------------------------- M/S. SUNDARAM FINANCE LTD., REGISTERED OFFICE:21, PATULLOS ROAD, CHENNAI-600 002, REPRESENTED BY ITS MANAGER, (LEAL) S.L.MOHAN. BY ADV. SRI.ARAVIND P. DATTAR (SR.) SRI.R.RAMADAS RESPONDENT(S): RESPONDENTS --------------------------- 1. STATE OF KERALA, REPRESENTED BY CHIEF SECRETARY TO GOVERNMENT, GOVERNMENT SECRETARIAT, THIRUVANANTHAPURAM. 2. THE SECRETARY TO GOVERNMENT, TAXES DEPARTMENT, GOVERNMENT OF KERALA, THIRUVANANTHAPURAM. 3. THE COMMISSIONER OF COMMERCIAL TAXES, GOVERNMENT OF KERALA, THIRUVANANTHAPURAM. 4. THE GENERAL MANAGER, RESERVE BANK OF INDIA, DEPARTMENT OF NON-BANKING SUPERVISION, BAKERY JUNCTION, THIRUVANANTHAPURAM. R1 TO R3 BY SPL. G.P. SRI.VINOD CHANDRAN R4 BY ADV. SRI.P.JACOB VARGHESE, SC, RBI THIS WRIT APPEAL HAVING BEEN FINALLY HEARD ON 18/11/2009, ALONG WITH WA NO.495 OF 2007 & CONN. CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.R. C.N.RAMACHANDRAN NAIR & V.K.MOHANAN, JJ. .................................................................... Writ Appeal Nos.540, 930, 495, 565, 533, 534, 539, 541, 549, 550, 551, 560, 563, 564, 661, 685, 625, 1075, 1065, 1077, 593, 764, 2042, 2045 of 2007 & 387, 1379 of 2008 and W.P.(C) Nos.25226, 25242, 18602 & 27283 of 2006, 23286, 28834, 21829, 20011 & 22303 of 2008, .................................................................... Dated this the 18th day of November, 2009. JUDGMENT Ramachandran Nair, J. Appellants which are Non-Banking Financial Companies (NBFCs) registered with Reserve Bank of India under Section 45IA of the Reserve Bank of India Act are challenging the judgment of the learned Single Judge holding that they are "money lenders" within the meaning of that term contained in the Kerala Money Lenders Act, 1958 (hereinafter called "the Act") liable to take licence under Section 3 of the Act for carrying on business in Kerala. Admittedly the appellants/petitioners are engaged in money lending in Kerala. However, their case is that being Non-Banking Financial Companies registered under Section 45 IA of the R.B.I. Act, they don't come 2 within the meaning of "person" contained in the definition clause of "money lender" under Section 2(7) of the Act. An alternate contention raised by the appellants/petitioners is that even if they fall under the main definition clause as "persons", they fall within the exception clause (f) of Section 2(7) of the Act which excludes institutions established by or under an Act of Parliament or of the Legislature of a State from the purview of the Act. The learned Single Judge, however, rejected the contentions and held that Non-Banking Financial Companies engaged in money lending in Kerala are covered by the provisions of the Money Lenders Act also and they have to, therefore, conform to the discipline contained in the Act such as taking of licence for every Branch, maintenance of accounts and charging of interest subject to the provisions of the Act and Rules etc. It is against this judgment of the learned Single Judge the appellants/petitioners have filed these Appeals/Writ Petitions. We have heard Senior counsel Sri.Aravind P. Dattar, Sri.T.P.Kelu Nambiar, Sri.V.Chidambaresh and other counsel appearing for the appellants/petitioners and the Special Government Pleader appearing 3 for the respondents. 2. In the first place, we notice that the appellants/petitioners have not challenged the constitutional validity of the provisions of the Kerala Money Lenders Act and the only relief sought by them before this court is for a declaration that they don't fall within the definition of "money lender" under the Act and so much so, notices impugned in the W.P.(C)s for taking registration under the Act and penalty proceedings issued for violations have to be vacated. We find that the learned Single Judge has exhaustively considered all the arguments advanced by the appellants and rendered the judgment on all the questions raised. Therefore, we have to only examine the correctness of the findings of the learned Single Judge. In other words, no new contention other than what was raised before the Single Judge and decided by him is raised before us. 3. As already noted by us, the argument is two fold. In the first place, appellants/petitioners contend that being companies registered under the Companies Act, they are not persons referred to in Section 2 (7) of the Act and hence are not covered by the definition clause. The 4 second contention is that even if every appellant/petitioner is treated as a "person" with the meaning of that term contained in the definition clause, being registered under Section 45IA of the R.B.I. Act every appellant/petitioner should be treated as "an institution established by or under an Act of Parliament or the Legislature of a State, which grants any loan or advance in pursuance of the provisions of that Act" as contained in the exception clause (f) to the definition of "money lender" contained in Section 2(7) of the Act. In order to appreciate the contentions, we have to necessarily refer to the definition clauses and for completeness we extract the definition clause hereunder in full except Explanations 1and 2 which are not required for the purpose of deciding these cases: "S.2(7) "money-lender" means a person whose main or subsidiary occupation is the business of advancing and realising loans or acceptance of deposits in the course of such business and includes any person appointed by him to be in charge of a branch office or branch offices or a liaison office or any other office by whatever name called, of his principal place of business and a pawn broker, but does not include-- (a) a bank or a co-operative society; or (b) the Life Insurance Corporation of India established 5 under Section 3 of the Life Insurance Corporation Act, 1956 (Central Act 31 of 1956); or (bb) the Industrial Credit and Investment Corporation of India Limited incorporated under the Indian Companies Act, 1913 (7 of 1913); (c) the Industrial Finance Corporation established under section 3 of the Industrial Finance Corporation Act, 1948 (Central Act 15 of 1948); or (d) x x x x (e) the State Financial Corporation established under Section 3 of the State Financial Corporation Act, 1951 (Central Act 63 of 1951); or (f) any institution established by or under an Act of Parliament or the Legislature of a State, which grants any loan or advance in pursuance of the provisions of that Act; or (g) any other institution in the public sector, whether incorporated or not, exempted by the Government by notification." On a detailed examination of the above definition clause, it is clear that among others covered, any person who is engaged in the business of advancing and realising loans or accepting deposits in the course of such business is a money lender. However, under sub-clauses (a) to (g), certain establishments which would otherwise fall within the scope of the definition of "money lender" are specifically excluded from the 6 operation of the said provisions. In other words, while coverage is for everyone engaged in money lending business, exception is granted only to persons specified in the sub-clauses. Appellants' specific case is that the Single Judge wrongly held that each of them fall within the meaning of "person" referred to in Section 2(7) of the Act. We notice from the judgment of the learned Single Judge that this argument was turned down by him following an earlier decision of this court in PREMIER KURIES & LOANS (P) LTD. V. STATE OF KERALA reported in 1995(1) KLT 726 wherein a Single Judge held that a company registered under the Indian Companies Act, 1956 will answer the description of "person" referred to in Section 2(7) of the Act. Even though "person" is not defined in the Act, the said term is defined in Section 3(42) of the General Clauses Act (Central Act), under which "a person shall include any company or association or body of individuals, whether incorporated or not". The appellants/petitioners have no case that their constitution is any way different from the institutions or organisations covered by this definition clause. In our view, even without a definition, the natural meaning of the term 7 "person" would obviously take in not only natural persons, but artificial persons like Companies, statutory corporations, societies etc. Further, the appellants have no case that the General Clauses Act has no application to the Money Lenders Act and, therefore, the definition of "person" contained in the General Clauses Act is rightly found applicable for the purpose of this Act by the learned Single Judge. We, therefore, reject the contention of the appellants/petitioners that they do not answer the description of "person" referred to in the definition of "money lender" under the Act. 4. The next question to be considered is whether the appellant/petitioner-institutions are established by an Act of Parliament or Legislature of a State, entitling them for exemption by virtue of clause (f) of Section 2(7) of the Act as claimed by them. The case of the appellants/petitioners is that they are registered under the Companies Act and so much so, they should be taken to be institutions established by Act of Parliament which is the Companies Act,1956. However, we cannot accept this contention because the Act of Parliament or the Legislature of a State referred to in clause (f) of 8 Section 2(7) should be a legislation providing for establishment of an institution to carry on business in the granting of loan or advance in accordance with the provisions of the said legislation. In other words, the institutions intended to be covered are statutory Corporations formed to carry on business in granting of loans or making advances based on the provisions of the statute under which they are created. Therefore, companies registered under the Companies Act or societies registered under the Co-operative Societies Act or even partnerships registered under the Partnership act or the like are not the institutions covered by clause (f) of Section 2(7). The appellants/petitioners have no case that they are carrying on money lending or finance business under the provisions of the statute under which they are constituted. In order to fall within the exception provided in sub-clause (f) of Section 2(7), it is not enough that the establishment is formed under one statute and financing is done in accordance with the provisions of another statute. In other words, a company registered under the Companies Act carrying on business in accordance with the provisions contained in the R.B.I. Act or the Money Lenders Act, cannot claim exception under 9 clause (f) of Section 2(7). Since admittedly appellants are not carrying on money lending business in accordance with the statutory provisions under which they are registered, they are not covered by sub-clause (f) of Section 2(7) of the Act and the learned Single Judge rightly rejected their claim. We, therefore, turn down the challenge against the judgment on this ground. 5. The next ground raised by the appellants/petitioners is that after the amendment to Chapter IIIB of the Reserve Bank Act by Act 23 of 1997 with effect from 1.9.1997, the State Act has become inoperative as against the appellants/petitioners which are companies registered under the Indian Companies Act. Senior counsel appearing for the appellants/petitioners took us through the amended provisions of Chapter IIIB of the R.B.I. Act, by which effective control of the Reserve Bank of India on the Non-Banking Financial Companies is ensured and for violations, corrective and penal remedies are provided. We have to consider this contention with reference to the constitutional powers of the State Legislature and that of the Parliament. While the R.B.I. Act is enacted under Entry 38 of List I of the VIIth Schedule, the 10 Indian Companies Act is enacted under Entry 43 of List I of the VIIth Schedule to the Constitution of India. In fact, it is worthwhile to note that even banking is an exclusive subject in the domain of the Parliament by virtue of Entry 45 of List I of the VIIth Schedule to the Constitution of India. However, Entry 30 of List II authorises the State Legislature to enact on "money-lending and money-lenders; relief of agricultural indebtedness". Appellants/petitioners have no dispute that the Kerala Money Lenders Act provide for only regulatory measures including licensing, fixation of rate of interest on loans etc. for money lenders. So much so, the Act is within the legislative competence of the State Legislature under Entry 30 of List II of the VIIth Schedule to the Constitution of India. We do not find any conflicting provisions contained in the R.B.I. Act and in the Kerala Money Lenders Act. As rightly pointed out by the learned Single Judge, the purpose of Chapter IIIB of the R.B.I. Act is essentially to ensure stability for the financial institutions and to prevent loss for the depositors. In fact, the various restrictions provided under Chapter IIIB on Non-Banking Financial Institutions are on acceptance of 11 deposit and deployment of funds. We do not want to repeat all the relevant provisions of Chapter IIIB because the learned Single Judge has explained the scope and purpose of each and every provision contained in Chapter IIIB of the R.B.I. Act. We are in complete agreement with the finding of the learned Single Judge that the provisions of Chapter IIIB of the R.B.I. Act are intended to protect the depositors, whereas the provisions of Money Lenders Act are essentially to protect borrowers. It is pertinent to note that restrictions contained in the Money Lenders Act are on rate of interest charged, procedure for sale of pawned articles etc. We, therefore, do not think that there is any conflict between the provisions of Chapter IIIB of the R.B.I. Act and the provisions of the Kerala Money Lenders Act and so much so, the provisions of both the Acts simultaneously apply to Non- Banking Financial Companies like the appellants/petitioners. We, therefore, reject the contention of the appellants/petitioners that since they are covered by the provisions of the Indian Companies Act and Chapter IIIB of the R.B.I. Act, they are outside the operation of Kerala Money Lenders Act. 12 6. The last ground raised by the appellants/petitioners is against rate of interest on lending fixed under the Kerala Money Lenders Act. Section 7(1) of the Act states that no money lender shall charge interest on any loan at a rate exceeding 2% above the maximum rate of interest charged by commercial banks on loans granted by them. We cannot allow the appellants/petitioners to challenge the statutory provisions in the abstract. In the first place, lending rates of commercial banks keep on changing and the same itself will depend on the nature of loan. Money lenders are permitted to charge 2% above the rates charged by commercial banks. In our view, the appellants/petitioners have not demonstrated how business cannot be carried on viably by observing the provisions of the Act in regard to charging of interest. So far, no action is taken against any of the appellants/petitioners for charging interest above the rate and the action initiated including penal action is only for carrying on business without licence. We do not find any substance in the challenge against statutory provisions either on licensing or on the ceiling on rate of interest. The appellants/petitioners have referred to communication issued by the 13 Reserve Bank of India (produced as Ext.P3 in W.P.(C) No.12378/2006 against which W.A. 540/2007 is filed) requesting the Government of Kerala to consider exemption to Non-Banking Financial Companies from the operation of Kerala Money Lenders Act. However, the Secretary to Government has communicated to the appellants/petitioners that Government does not propose to exempt NBFCs from the operation of Kerala Money Lenders Act because according to the Government, borrowers' interest would be protected only by enforcing the provisions of the Kerala Money Lenders Act. In the first place, R.B.I. itself felt that the provisions of the Kerala Money Lenders Act are applicable to the NBFCs because they are engaged in money lending. Therefore, the R.B.I.'s letter goes against the contention of the appellants/petitioners that they are not covered by the Kerala Money Lenders Act. So far as Government's decision to deny exemption to them from the operation of the Kerala Money Lenders Act is concerned, it is not within the powers of this court to interfere with policy decision of the Government not to exempt NBFCs from the provisions of the Act. The appellants/petitioners further contended that 14 no useful purpose is served by applying the provisions of the Kerala Money Lenders Act against them such as compelling them to take licence, to maintain books of accounts etc. because effective control is exercised by the R.B.I. by enforcing the provisions of Chapter IIIB of the Reserve Bank of India Act. We have already found that the provisions of the R.B.I. Act are essentially to protect the depositors and there is hardly any provision therein to protect the interest of the borrowers, for which purpose Kerala Money Lenders Act is enacted by the State. Further, the court cannot declare statutory provisions invalid even if the court feels the statutory measures as unnecessary or ineffective. Here again, we feel it is for the Legislature to decide whether to rescind the statute or exempt the appellants/petitioners, if they feel that the control by R.B.I. is sufficient to protect public interest. We, therefore, confirm the judgment of the learned Single Judge and dismiss all the Writ Appeals and Writ Petitions. However, we make it clear that if within one month from date of receipt of copy of this judgment, the appellants/petitioners remit licence fee arrears and apply for licence for the years involved and comply with the statutory 15 requirements, the penal action taken against them will be revoked by the concerned officers and no penalty or other action for previous violations will be initiated. C.N.RAMACHANDRAN NAIR Judge V.K.MOHANAN Judge pms