Business Laws

Supreme Court ruling on NBFC regulation

Team Gavel | Updated on: Jun 18, 2022
Watch word: The RBI Act gives the central bank oversight of NBFCs, from registration to winding-up stage

Watch word: The RBI Act gives the central bank oversight of NBFCs, from registration to winding-up stage | Photo Credit: PAUL NORONHA

Apex Court held that RBI, and not state law, should oversee registered NBFCs

Whenever a central legislation is at loggerheads with states’ laws on the same subject, it is the central law that shall prevail. Period.

This has once again been categorically stated by the Supreme Court of India while deciding a recent case related to the jurisdiction over non-banking financial companies (NBFCs).

The court said the jurisdiction over NBFCs registered under the Reserve Bank of India Act, 1934, shall vest with the central bank, even if a state government has enacted its own Money Lenders Act.

The Money lenders Act was enacted by the state government by exercising its powers under Entry 30 in List-II of the seventh schedule of the Constitution.

It all started with Kerala passing the Kerala Money Lenders Act, 1958, to regulate moneylending in the state. NBFCs registered with the RBI challenged this legislation, which was dismissed by the Single Judge of Kerala High Court. The judge found “no repugnancy” between the central and state laws and said they could co-exist. This order was affirmed by the Division Bench. The NBFCs then went to the Supreme Court.

Meanwhile, Gujarat also brought in a similar law and the NBFCs there approached the High Court of Gujarat. But in this case, the High Court of Gujarat struck down the state law, opining that there was repugnancy between the two Acts. Gujarat went to the Supreme Court against this.

The apex court heard and decided both appeals together.

Manisha Singh and Nisha Sharma, lawyers with the law firm LexOrbis, explained in their article in Mondaq that the Supreme Court had examined the source of power of the state legislature as well as Parliament to enact a law dealing with the subject at hand — that is, moneylending, and incorporation and regulation of financial corporation: “The subject related to incorporation, regulation and winding up of financial corporation falls in entry No. 43 in list-I (Union List) of the seventh schedule of the Constitution. And the subject related to moneylending and moneylenders falls in entry No. 30 in list-II (State List) of the seventh schedule of the Constitution. Therefore, the Court held that the competence of legislature of the state government to enact a law to regulate business of moneylending cannot be questioned as their power is traceable to Entry 30 in list-II of the seventh schedule.”

The Supreme Court felt that chapter-III of the RBI Act "is a complete code in itself”; it provides a supervisory role for the RBI over the functioning of NBFCs, from registration to winding up.

It observed that the question was not whether there was repugnancy or not. Applying the ‘doctrine of eclipse’, it held that the state law may continue to exist, but stands eclipsed by the central law. It referred to Deep Chand vs State of UP and observed that the moment Parliament stepped in to codify the law related to registration and regulation of NBFCs, by inserting provisions in chapter IIIB of the RBI Act, it would cast a shadow on the applicability of the Money Lenders Act enacted by the state governments.

Repugnancy

On the applicability of Article 254 of the Constitution, the Court, while relying on the judgement in Innoventive Industries Limited vs ICICI Bank and Another, observed that the question of repugnancy under Article 254 does not arise once it is established that the RBI Act is traceable to an entry in list-I, and state enactment is traceable to an entry in list-II. Instead, the Court took recourse to the non-obstante clause of Article 246(1) and observed that the RBI Act, being a parliamentary legislation, is in a dominant provision.

Conflict

The Court also observed the conflict between the two Acts inasmuch as the Money Lenders Act empowered the debtor under section 8(1) to deposit into a civil Court the money due to the moneylender. And section 8(2) empowers the civil Court to pass orders recording full or part satisfaction of the loan. But, to the contrary, certain NBFCs are entitled to enforce security interest without the intervention of civil courts and the remedy of the borrower (debtor) lies only before the Debt Recovery Tribunal and, in such cases, the jurisdiction of civil courts is also barred, note Singh and Sharma. Therefore, the argument of the state that the provisions of Articles 246 and 254 cannot be invoked, since there is no conflict between them, was rejected.

Published on June 19, 2022
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