The Hindu Business Line : Madras HC stays TN law on exorbitant interest

The petitioner said "the Act had placed unreasonable restrictions on the right of the members to carry on their business, nullifying the constitutional guarantee of free trade and commerce."

Chennai , June 30

A LAW enacted by the Tamil Nadu Government in June 2003, fixing a ceiling on rate of interest chargeable on loans advanced to the public, which had not been enforced effectively has finally been put in cold storage.

A Madras High Court order has stayed the provisions of the Tamil Nadu Prohibition of Charging Exorbitant Interest Act, 2003 following a writ petition challenging it on the ground of its violating the provisions of the Constitution.

Mr Justice R. Balasubramanian, who heard the petitioner, the Federation of Financiers Association, Namakkal, Salem, accepting the contention that the impugned law was, inter alia, violative of Article 14 of the Constitution, stayed the operation of the provisions of Sections 4 and 9 of the Tamil Nadu Act.

Section 9 seeks to create an offence of `abetment of suicide' if a money-lender charged interest at more than the ceiling of 9 per cent fixed under the impugned Act.

The Judge ordered that there would be an interim stay on the following lines until further orders: If need arises, register a crime u/s 4 or u/s 9 or under both sections of the Act against any member of the petitioner-association.

The investigating agency shall only investigate the crime and shall not file final report before the court without further orders of this court.

The petitioner, whose members were in the business of providing finance to its members and the public in general, submitted that the impugned law had virtually brought the business of the members to a standstill, inasmuch it had made punishable lending of monies at a rate higher than 9 per cent.

The impugned Act had placed unreasonable restrictions on the right of the members to carry on their business, nullifying the constitutional guarantee of free trade and commerce throughout the country, the petitioner contended. Besides, the law had also perpetrated hostile discrimination between pawnbrokers and other indigenous moneylenders, the petitioner said.

The TN Government promulgated the Tamil Nadu Prohibition of Charging Exorbitant Interest Ordinance, 2003 on June 9, 2003. It was later enacted as an Act by the State Legislature.

The petitioner's counsel, Mr M.S. Krishnan, said that following the enactment of the law, the members of the Association had to turn down a number of prospective borrowers as it was financially unviable for them to lend loans at 9 per cent a year when their cost of funds itself worked out to 15 per cent. In fixing an abysmally low rate of 9 per cent as the ceiling, the legislature had completely lost sight of commercial exigencies and ground realities.

The impugned Act was also violative of Article 19(1)(g), read with Article 19(6) of the Constitution, as it placed unreasonable restrictions on the freedom of business and trade. It was common knowledge that the Reserve

Bank of India was vested with authority to read the monetary climate in the country and fix the parameters for charging interest on loans granted to the public.

The prime lending rate fixed by the RBI, i.e., the rate at which the scheduled banks might lend to the public, was around 10.5 per cent. Such being the case, fixing an interest rate ceiling of 9 per cent was totally unfair and arbitrary.

It should be noted that the legislature had sought to impose the restrictive interest control regime at a time when the economy, national and regional, was being opened up, and market forces were allowed to have free play. In a free market, any lender who charged interest at a rate higher than the prevailing rate, would automatically be pushed out of business since funds were available for a cheaper rate of interest elsewhere.

The petitioner's counsel contended that the impugned Act was clearly discriminatory inasmuch as the pawn brokers, who were governed under the Tamil Nadu Pawn Brokers Act, 1943, were allowed to charge interest at the rate of 16 per cent for loans advanced, while the petitioner was permitted to charge interest only at 9 per cent.

It was also submitted by the petitioner that Section 9 of the impugned Act was violative of Article 21, read with Article 14, of the Constitution. The petitioner prayed for grant of interim stay of the operation of Sections 4 and 9 of the impugned Act pending disposal of the writ petition.

It was also prayed for issue of a declaration that all the provisions of the impugned law were unconstitutional and ultra vires the powers of the legislature of Tamil Nadu.

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