Case: Peerless Gen.F.&amp; I.Co.Ltd.  Vs. Reserve Bank Of India

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 v. 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 er ror 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". 48. 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 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. 49. 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. 50. 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. T he 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. 51. 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 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. 52. 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 pre pared to consider any new proposal which would observe the public interest. 53.

Court's decision (1 = petition accepted / positive for appellant, 0 = rejected / negative): 1

Reasoning from the judgment:
1[ds]A combined reading of the above provisions unmistakably goes to show that t he 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-ban king 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-s. (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 Ban k 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 qualifying 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. 45 K (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 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. v. Kerala State Electricity Board, 1976 (1) SCRour 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.In the application forms and in the advertisements 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 t he 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 direction s 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 i.e. through publichas 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,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 ofhave 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 me rely 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 (i.e. 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 Pee rless. 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. 3.6 crores. Des pite 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 co ncerns. 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 "addressee not known" etc. Thus we have to keep in mind the above mushroom of companies also which have set foot in this sort ofwould 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 agent s on securing a fresh business and a disincentive to collect subscriptions of subsequentis 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 impugnedcontention 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 o f 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 ofmay 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 expensesamongst 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 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 constitutionallydo 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 theare 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. T he 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,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 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 suchregulation intends to pre serve 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 depositors/subscribers 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 bettermany 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.