Supreme Court states RBI's powers are legally binding

Supreme Court states RBI's powers are legally binding

It has control over financial institutions like the Small Industries Development Bank of India

A Supreme Court bench comprising Justice Subhash Reddy and Justice Hrishikesh Roy has stated that the Reserve Bank of India (RBI) has wide supervisory powers over financial institutions like the Small Industries Development Bank of India (SIDBI). So, deriving power from the RBI Act or the Banking Regulation (BR) Act, any direction issued by it is statutorily binding.

The court was presiding over a matter regarding delayed payments of the principal amount and the interest accrued on bonds issued by SIDBI.

The case relates to the issuance of a number of bonds by the appellant (SIDBI) to CRB Capital Markets (CRB Capital). The bonds were then sold to a person named Shankar Lal Saraf, who further sold those to the respondent (a company named SIBCO) in 1998. CRB Capital then went through the winding-up proceedings at the behest of the RBI.

The respondent then claimed payment on the bonds but the appellant refused to do so citing CRB Capital's involuntary liquidation at the behest of RBI. The respondent approached the company court and requested Saraf to file an interlocutory application in the company court claiming that the bond payment transaction should be treated as outside the purview of the liquidation proceedings under the Companies Act, 1956.

The company court adjudged that the bonds were beyond the purview of the liquidation proceedings, following which SIDBI made the payment of the principal amount together with interest.

Later, during an audit, the respondent detected a delayed payment of interest and demanded this payment from SIDBI. But the latter refused, citing that RBI had issued a facsimile directing the defendant not to affect any transfer. Else, it would have to deal with any security invested by CRB Capital and its group companies without the prior permission of the official liquidator appointed by the company court.

Aggrieved by the refusal, the respondent filed a civil suit claiming delayed redemption of the bonds. While the trial court treated RBI's order as a directive and noted that there was a clear stipulation against affecting any transfer the High Court of Calcutta reversed the order of the trial court.

It directed SIDBI to pay the interest amount from the date of accrual on the bonds. Thus, the appellant-defendant who sought to set aside the High Court of Calcutta's judgment made an appeal.

The bench of the apex court took note if the facsimile issued by the RBI to SIDBI was a directive or a suggestion. Going by the Banking Regulation Act, 1949, which bestows power to the RBI to give directions to banking companies, the court stated, "It is not necessary for the RBI to mention a specific provision, before issuing directions for it to have statutory consequences. All that is required is the authority under the law."

The bench concluded that it was undisputed that any direction by the RBI was compelling and enforceable like the provisions of the RBI Act. It ruled that the communication was a direction with appropriate statutory backing traceable to the RBI Act and the BR Act.

Regarding the respondent's claim that SIDBI derived undue benefit by intentionally withholding the payment, the court noted that since the amounts due on the bonds were immediately transferred to the 'accrued interest' head and not used by SIDBI, any argument regarding mala fide intention behind withholding the payment by it were unacceptable.