Case: Bhavesh D. Parish Vs. Union of India

The appellants who carry on the business of shroffs are impugning the validity of s. 9 [sic - S. 45-S] of the Reserve Bank of India Act as amended by the Amendment Act, 1997 (hereinafter referred to as the Act), on the ground that the said provision is violative of Arts. 14 and 19(1)(g) of the Constitution of IndiaThe trade of business of shroffs in India has been in existence for a long time. This trade is carried on not only in cities but also in small towns and villages in parts of IndiaThe appellants are shroffs engaged in the business of providing credit to the members of the public. The traditional mode of organising the business of shroffs over the past several decades has been by way of partnership firms. The nature of the services practised by the appellants generally involved maintaining a mutual current account where the customer may either place deposit on call or withdraw money on call, without security. The financing activity of the shroff firms was through capital contributions of the partners/proprietor and deposits made by members of the public. Some of the other activities of the shroffs include cheque discounting, the issuance of hundis the collection of cheques from different centres and providing other similar facilities to customers. The services extended by the appellants are availed of by small and medium-sized traders, professionals, salaried workers, agriculturists and individualsThe Reserve Bank of India (hereinafter referred to as the RBI) is a statutory corporation constituted as the Central Banking Authority for the country by the Reserve Bank of India Act, 1934. The RBI is constituted, inter alia, to regulate the issue of bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage. The RBI is also vested with various powers to regulate the currency and credit system of the country. The powers so vested in RBI include the power to issue directions to non-banking institutions receiving deposits and to financial institutions. By amendment in 1983 a new Chapter III-B was inserted in the said Act. This chapter inserted ss. 45-H to 45-Q which were provisions relating to non-banking institutions receiving deposits and financial institutions. In the Statement of Objects and Reasons it was provided that the existing enactments relating to banks did not provide for any control over companies or institutions, which, although were not treated as banks, accept deposits from the general public or carry on other business which was allied to banking. For ensuring more effective supervision and management of the monetary and credit system by the RBI, it was observed that the RBI should be enabled to regulate the conditions on which deposits may be accepted by these non-banking companies or institutions. The provisions of the said Chapter III-B did not apply to individuals or firms like the appellants who are not incorporated but still do business which is akin to that of bankingIn order to place some restrictions of the acceptance of deposits by unincorporated bodies, by the Banking Laws (Amendment) Act, 1983 (Act 1 of 1984), Chapter III-C and s. 58-B(5A) were inserted into the Act.

Court's reasoning:
8.25 We, therefore, suggest that the Reserve Banks control may be extended to finance corporations and necessary enabling legislation be passed to that effect. We recognise that the administrative task of watching and regulating the operations of a large number of small firms will be difficult. We, therefore, suggest that if the law permits, only companies may be allowed to do the banking business in the sense of accepting deposits from the public for the purpose of lending or investment. In that case, the Banking Regulation Act would govern the operations of the Bangalore type finance corporations. If, however, the law does not permit it, any scheme of regulation may have as one of its objections the reduction in the number of finance corporations besides, of course, the safeguarding of depositors interestit is a constitutional truism that restrictions in extreme cases should be pushed to the point of prohibition, if any lesser strategy will not achieve the purpose." It cannot be denied that shroffs have played an important role in providing finance in the rural sector and in small towns. But, despite the services which they may have rendered, it is difficult to accept the contention that the RBI was not justified in imposing ban on unincorporated bodies accepting deposits from public while carrying on financing business. The inherent danger to the public especially in small towns and villages in permitting such business to be carried on unchecked and unregulatory was ample justification for the impugned legislation, keeping in mind the experience of the public which had been dealing with such unincorporated bodies in Kerala and Tamil Nadu. It is open to the appellants to organise their business within the permissible legal set up by formingg financial corporations and functioning in accordance with ChapterB of the Act and the directives issued by the Bank from time to time. The prohibition on partnership firms to carry on their business like that of shroffs cannot be regarded as being an unreasonable restriction on the fundamental right of the appellants to carry on their trade. They can continue lending money as long as they do not borrow from the publicThe services rendered by certain informal sectors of the Indian economy could not be belittled. However, in the path of economic progress, if the informal system was sought to be replaced by a more organised system, capable of better regulation and discipline, then this was an economic philosophy reflected by the legislation in question. Such a philosophy might have its merits and demerits. But these were matters of economic policy. They are best left to the wisdom of the legislature and in policy matters the accepted principle is that the Courts should not interfere. Moreover, in the context of the changed economic scenario the expertise of people dealing with the subject should not be lightly interfered with. The consequences of such interdiction can havee ramifications and can put the clock back for a number of years. The process of rationalisation of the infirmities in the economy can be put in serious jeopardy and therefore, it is necessary that while dealing with economic legislations, this Court, while not jettisoning its jurisdiction to curb arbitrary action or unconstitutional legislation, should interfere only in those few cases where the view reflected in the legislation is not possible to be taken at allExamining the validity of the amended s.S of the Act by applying the principles enunciated over the years by this Court, and as encapsuled in the passage quoted in the earlier part of this judgment from this Courts decision in Papnasan Labour Unions case (supra) we find that the said section is in noway illegal or bad in law. Sec.S no doubt prohibits the conduct of banking business by an unincorporatedg entity like a shroff, but this prohibition has come about, inter alia, in the interest of unwary depositors and borrowers (from shroffs) and with a view to prevent them from committing financial suicide. Earlier attempts to adequately regulate theg institutions not having achieved the desired result of protecting large number of depositors from unincorporated financial institutions which would suddenly mushroom overnight and then vanish without a trace but taking with it depositors money, left the RBI with no alternative but to prohibit such unincorporated entities from conducting financial business which was more than akin to bankingThe restrictions imposed against acceptance of deposits by unincorporated bodies carrying on financial activity or the business of deposit acceptance or lending in any manner are in the larger interest of general publics few persons accepting such deposits. The need for such restrictions had become acute and imperative in view of large scale mismanagement of public funds by such unincorporated bodiesAccordingly, we hold that the provisions of s.S of the Act are validBefore we conclude there is another matter to which we must advert to. It has been brought to our notice that s.S of the Act has been challenged in various High Courts and few of them have granted the stay of provisions of s.. Whenconsidering an application for staying the operation of a piece of legislation, and that too pertaining to economic reform or change then the Courts must bear in mind that unless the provision is manifestly unjust or glaringly unconstitutional, the Courts must show judicial restrain in staying the applicability of the same. Merely because a statute comes up for examination and some arguable point is raised, which persuades the Courts to consider the controversy, the legislative will should not normally be put under suspension pending such consideration. It is nowd that there is always a presumption in favour of the constitutional validity of any legislation, unless the same is set aside after final hearing and, therefore, the tendency to grant stay of legislation relating to economic reform, at the interim stage, cannot be understood. The system of checks and balances has to be utilised in a balanced manner with the primary objective of accelerating economic growth rather than suspending its growth by doubting its constitutional efficacy at the threshold itselfWhile the Courts should not abrogate its duty of granting interim injunctions where necessary, equally important is the need to ensure that the judicial discretion does not abrogate from the function of weighing the overwhelming public interest in favour of the continuing operation of a fiscal statute or a piece of economic reform legislation, till on a mature consideration at the final hearing, it is found to be unconstitutional. It is, therefore, necessary to sound a word of caution against intervening at the interlocutory stage in matters of economic reforms and fiscal statutesA number of petitions had been filed in this Court seeking transfer of writ petitions pending in different High Courts. By order dt. 17th February, 2000, those transfer petitions were dismissed as not pressed. Besides the writ petitions, in respect of which, those transfer petitions had been filed, a number of other petitions are pending disposal in various High Courts. In quite a few of them the High Courts have granted an interim injunction staying the operation of the implementation of the amended s.S of the Act. For the view we have taken now, it is imperative that these petitions, pending in the different High Courts, are formally disposed of at an early date