In a significant ruling, the Supreme Court has held that state enactments regulating the business of moneylending would have no application on non-banking finance companies (NBFCs) registered with, and regulated by, the Reserve Bank of India (RBI).

The apex court has, in the matter of Nedumpilli Finance Company vs State of Kerala and several other civil appeals, held in its final judgment that Chapter III-B (dealing with NBFCs in RBI Act) is a complete code in itself as regards regulation of NBFCs. In addition to this, the RBI Act has provisions which override other state laws.

This would imply that NBFC regulation is only under the RBI Act, and only the Central bank has the powers to regulate the NBFCs registered with it., said experts. This is even as the Central bank’s regulatory framework does not specifically address the aspect of regulating interest rates.

Overriding effect

The Supreme Court has held that Section 45-Q of RBI Act confers overriding effect upon Chapter III-B over other laws. Therefore the states of Gujarat and Kerala cannot contend that that the laws made by them are in addition to the provisions of Chapter III-B.

“We are of the considered opinion that the Kerala Act and the Gujarat Act will have no application to NBFCs registered under the RBI Act and regulated by RBI. Therefore all appeals filed by NBFCs against the judgment of the Kerala High Court are allowed. Likewise, appeals filed by the State of Gujarat against the judgment of the Gujarat High Court are dismissed,” the order issued on Tuesday said.

Dual regulation avoided

Reacting to this judgment, Raman Aggarwal, Director and Spokesperson, of Finance Industry Development Council (FIDC), told BusinessLine, “This matter was a long-pending issue going on for many years. It was a serious matter. Had this gone against NBFCs, it would have meant dual regulation by the RBI and state governments, which could have created utter confusion.”

Aggarwal noted that the SC order is absolutely clear that it is only RBI that had the jurisdiction of regulation of NBFCs, and the RBI Act supersedes state enactments. With this, state governments cannot pass laws that cover their applicability on NBFCs. Hitherto, states were taking the position that even NBFCs ought to register themselves as moneylenders under the State Moneylender laws. 

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