Case: T. Velayudhan Achari &amp; Another Vs. Union of India &amp; Others

3. In order to appreciate the challenge the necessary legal background may be set out4. In the year 1949, the Banking Regulation Act of 1949 was enacted. That contained regulatory provisions in regard to banking under the surveillance of the Reserve Bank of India as to what would constitute "banking" as defined under Section 5(b) of the 1949 Act5. In the year 1959, the Banking Companies (Amendment) Act, 1959 was passed. Section 17 and 18 were substituted which required banking companies to create reserve fund and maintain cash reserve. In the year 1963, Banking Laws (Miscellaneous Provisions) Act, 1963 inserted Chapter III-B in the Reserve Bank of India Act. This chapter conferred extensive powers on the Reserve Bank of India to issue suitable instructions, to regulate and monitor diverse activities of non-banking companies. The powers to control and regulate these non-banking institutions are set out in Section 45-I to 45-L. While exercising these powers, the Reserve Bank of India was issuing various directions to these non-banking financial institutions. One such important direction was issued on January 1, 1967 to the effect that the non-banking financial companies were not to hold deposits in excess of 25 per cent of its paid-up capital and the reserves as also to non-banking, non-financial companies. They were also required to take steps to keep the deposits within the limits. This direction was challenged unsuccessfully before the Madras High Court as seen from the case of Mayavaram Financial Corporation Ltd. v. Reserve Bank of India6. In 1968, by Banking Laws (Amendment) Act, 1968 Sections 10-A to 10-D were introduced. Section 10-A provided that the Board of Directors shall include persons with professional or special knowledge. Section 10-A(5) empowered the Reserve Bank of India to vary the composition of the Board7. When a report of the Study Group of non-banking financial intermediaries was submitted in the year 1971 that was studied. Thereafter in 1973 the Reserve Bank of India issued Miscellaneous Non-Banking companies (Reserve Bank) Directions, 1973 placing certain restrictions on companies carrying on prize chit and chit business from receiving deposits from the public8. In 1974, Section 58-A of the Companies Act was inserted by the Companies (Amendment) Act of 1974, which came into force from February 1, 1975. The object was to regulate deposits received by non-banking non-financial companies. The financial companies were already covered by Reserve Bank of India directions under the Reserve Bank of India Act. Therefore, they were exempted under Section 58-A(7) from the purview of that section. Since the non-banking non-financial companies came within the purview of Section 58-A, the earlier directions issued by the Reserve Bank of India Act to non-banking non-financial companies in the year 1966 were withdrawn. By an amendment of 1977, Section 58-A was further enlarged and the Central Government was empowered to grant extensions9. In June 1974, another Study Group was constituted which is popularly known as James Raj Committee10. In July 1975, the above Study Group gave its report. In accordance with the recommendations of the Study Group elaborate rules were issued by the Central Government under Section 58-A, called Banking Companies (Acceptance of Deposits) Rules, 1975 with a view to regulate the various activities of the companies to accept deposit from public. The validity of the section and the deposit rules were questioned. This Court in Delhi Cloth and General Mills Co. Ltd. v. Union of India upheld the same11. In 1977, directions were issued by the Reserve Bank of India superseding earlier directions of 1966 and 197312. In 1978, Bill 183 of 1978 called Banking Laws (Amendment) Bill, 1978 was introduced in the Parliament. The said Bill provided limits on depositors which were lower than the current provisions. However, the Bill lapsed on dissolution of Parliament. Thereafter Prize Chits and Money Circulation Schemes (Banning) Act, 1978 was enacted. This was also challenged, But that challenge was thrown out by this Court in Srinivasa enterprises v. Union of India.13. In 1981, several new regulatory directions were given by the Reserve Bank of India. Inter alia they included restrictions on accepting or renewing deposits from shareholders, Directors etc. which exceeded 15 per cent of the net-owned funds of the companies as also restricted payment of interest on deposits as a rate of interest exceeding 15 per cent per annum. The validity of the amendments was upheld by the Madras High Court in the case reported in A.S.P. Aiyar v. Reserve Bank of India 1983 AIR(Mad) 330)14. In State of W.B. v. Swapan Kumar Guha known as Sanchaita case this Court while quashing the FIR launched against the firm Sanchaita Investments, directed that the Government and Reserve Bank of India should look into the matter deeply. It is in this background the Banking Laws (Amendment) Act, 1983 came to be the enacted. Section 45-S statedDeposits not to be accepted in certain cases. - (1) No person, being an individual or a firm or an unincorporated association of individuals shall, at any time, have deposits from more than the number of depositors specified against each, in the table belowTABLE(i) Individual Not more than twenty-five depositorsexcluding depositors who are relativesof the individual(ii) Firm Not more than twenty-five depositors perpartner and not more than two hundred andfifty depositors in all, excluding, ineither case, depositors who are relativesof any of the partners(iii) Unincorp- Not more than twenty-five depositors perorated individual and not more than two hundred andassociation fifty depositors in all, excluding in eithercaseof depositors who are relatives of any of theindividuals individuals constituting the association(2) Where at the commencement of Section 10 of the Banking Laws (Amendment) Act, 1983, the deposits held by any such person are not in accordance with sub-section (1), he shall, before the expiry of a period of two years from the date of such commencement, repay such of the deposits as are necessary for bringing the number of depositors within the relative limits specified in that sub-sectionExplanation. - For the purposes of this Section -(a) a person shall be deemed to be a relative of another if, and only if, -(i) they are members of a Hindu Undivided family; or(ii) they are husband and wife; or(iii) the one is related to the other in the manner indicated in the list of relatives belowList of Relatives1. Father. 2. Mother (including step-mother). 3. Son (including step-son). 4. Sons wife. 5. Daughter (including step-daughter). 6. Fathers father. 7. Fathers mother 8. Mothers mother. 9 Mothers father. 10. Sons son. 11. Sons sons wife. 12. Sons daughter. 13. Sons daughters husband. 14. Daughters husband. 15. Daughters son 16. Daughters sons wife. 17. Daughters daughter. 18, Daughters daughters husband. 19. Brother (including step-brother). 20. Brothers wife. 21. sister (including step-sister) 22. Sisters husband;(b) a person in whose favour a credit balance is outstanding for a period not exceeding six months in any account relating to mutual dealings in the ordinary course of trade or business shall not, on account of such balance alone, be deemed to be athe number of depositors has come to be limited15. As to the penalty for contravention of Section 45-S it is provided for under Section 58-B (5-A) It runsIf any person contravenes any provision of Section 45-S, he shall be punishable with imprisonment for a term which may extend to two years. or with fine which may extend to twice the amount of deposit received by such person in contravention of that section or rupees two thousand, whichever is more, or with both"These provisions were challenged by the appellants in the various civil appeals as violative of Articles 14 and 19 of the Constitution. A Division Bench of the High Court of Delhi in Kanta Mehta case45-S read with Section 58-B(5-A) of Chapter III-C of the Reserve Bank of India Act, 1934, as introduced by Section 10 of the Banking Laws (Amendment) Act, 1983, is not violative of Articles 14 and 19 of the Constitution. There is nothing demonstrably irrelevant or perverse in limiting in Section 45-S the number of depositors that an individual, firm or association could acceptNor is there any element of compulsion on individuals and firms or associations which are not incorporated to incorporate themselves as a company and Article 19(1)(c) is not violated by the provisions of Section 45-S limiting the number of depositors whom individuals, firms and unincorporated associations could acceptChapter III-C of the Reserve Bank of India Act, 1934, imposes reasonable restriction on the right of individuals. firm and unincorporated associations to carry on the business of acceptance of deposits and advancing or giving loans to the public. There is also a further safeguard that Chapter III-C is being operated under the supervision and control of the Reserve Bank of IndiaThe business of acceptance of deposits from the public does not fall within Entry 30 or Entry 32 of List II of Schedule VII of the Constitution. It falls within Entry 45 or in any case under Entry 97 of List I of Schedule VII under which only Parliament has power to pass the impugned legislation. Parliament had full competence and power to pass Chapter III-C of the Reserve Bank of India Act,

Court's reasoning:
39. Coming to the last point, as to whether Section 58-B(5-A) is violative of Article 20(1) of the Constitution, we find, when a similar argument was raised against Section 58-A of the Companies Act, that was repelled by this Court in Delhi Cloth and General Mills Co. Ltd. v. Union of IndiaG. A. shah canvassed one more contention, After stating that Rule 3-A became operative from April 1, 1978, he specifically drew attention to the proviso to Rule 3-A(1) which required that with relation to the deposits maturing during the year ending on March 31, 1979, the sum required to be deposited or invested under sub-rule (1) of Rule 3-A shall be deposited or invested before September 30, 1978. It was then contended that this provision would necessitate depositing 10% of the deposits maturing during the year ending with March 31, 1979 which may have been accepted prior to the coming into force of Rue 3-A and to this extent the rule has been made retrospective and as there was no power conferred by Section 58-A to prescribe conditions subject to which deposits can be accepted retrospectively Rule 3-A is ultra vires Section 58-A. Unquestionably, Rule 3-A became operative from April 1, 1978. The obligation cast by Rule 3-A is to deposit 10% of the deposits maturing during the year in the manner prescribed in Rule 3. Some deposits would be maturing between April 1, 1978 and March 31, 1979. To provide for such marginal situation, a proviso is inserted. Does it to make the rule retroactive ? Of course, not In D. S. Nakara v. Union of India a Constitution Bench of this Court has, in this context observed as underA statute is not properly called a retroactive statute because a part of the requisites for its action is drawn from a time antecedent to its passing.Viewed from this angle, the provisions can be properly called prospective and not retroactive. Therefore, the contention does not commend to us.In the light of this, we should hold that the ruling of the Madras High Court in Chennai Bottling Co. Pvt. Ltd. isTherefore, we are in entire agreement with the Delhi High Court44. Since, as we have stated above, all the appellants and writ petitioners were praying for time to comply with these provisions, the matter was adjourned from time to time. Though some of them have complied with the requirements of law yet a few others have not done so. We make it clear that in spite of this indulgence, their failure to comply cannot be countenanced