Supreme Court rules on RBI regulated NBFC

Supreme Court rules on RBI regulated NBFC

The court clarified that the competence of the legislatures of the states could not be questioned

The Supreme Court has held that Non-Banking Financial Companies (NBFC) regulated by the Reserve Bank of India (RBI), will not come under the purview of the state statutes.

A bench of Justice Hemant Gupta and Justice V Ramasubramanian ruled that the Kerala Money Lenders Act, 1958 and the Gujarat Money Lenders Act, 2011 will have no application to NBFCs registered under the Reserve Bank of India Act, 1934 and regulated by the RBI.

The court stated, "Once it is found that the RBI Act provides a supervisory role for the RBI to oversee the functioning of NBFCs, from the time of their birth (by way of registration) till the time of their commercial death (by way of winding up), all activities of NBFCs automatically come under the scanner of the RBI.

"As a consequence, the single aspect of taking care of the interest of the borrowers which is sought to be achieved by the state enactments gets subsumed in the provisions."

Applying the Doctrine of Eclipse, the court held, "Assuming that the Kerala Act was valid in its application to NBFCs when it was made on the ground that the business of money lending is traceable, it has to give way to the parliamentary enactment."

It added, "When the Parliament stepped in to codify the law relating to the registration and regulation of NBFCs by inserting certain provisions in the then RBI Act, the same would cast a shadow on the applicability (assuming it is applicable) of the provisions of the Kerala Act to NBFCs registered under the RBI Act and regulated by the RBI."

The apex court was considering two sets of appeals.

The first one was filed by several NBFCs operating in the State of Kerala against the decision of the Kerala High Court dismissing their petitions seeking a declaration that NBFCs registered under the RBI Act do not come within the purview of the Kerala Act.

(The NBFCs had previously approached the Government of Kerala seeking exemption, but it proved unsuccessful).

The second set of appeals was moved by the State of Gujarat against the decision of the Gujarat High Court. The court had held that the Gujarat Act was ultra vires the Constitution of India for legislative incompetence and it sought to have control over NBFCs registered under the RBI Act.

On reviewing the schemes of the two-state enactments, the court clarified that the competence of the legislatures of the states of Kerala and Gujarat could not be questioned.

However, it considered whether, after the enactment of a law by the Parliament, such financial corporations would continue to be also regulated by the state enactments, as they might also come within the purview of the definition 'money lenders.'

In its judgment, the court stated, "No NBFC can carry on business without being registered under the Act and an NBFC which takes birth with the registration under the Act is liable to be wound up at the instance of the RBI. The entire life of an NBFC from the womb to the tomb is also regulated and monitored by the RBI."

The bench observed that NBFCs played a vital role in contributing to the country's financial health and, therefore, to say that the RBI has no power over the interest rates charged by them would strike at the very root of the statutory power vested with the RBI.