Allowed

Rise Capital Operative Finance Private Ltd. v. the Reserve Bank of India

Kerala HC4 Jul 2019WP(C)/2763/2019

Case brief

AI extract

What is this about?

High Court allowed writ petition quashing RBI's cancellation of petitioner's NBFC registration for failure to provide a statutory opportunity to cure a marginal net owned fund shortfall. Petitioner granted leave to operate pending reconsideration.

What did the court decide?

Petition allowed. RBI directed to reconsider matter per appellate order after hearing. Interim leave granted to petitioner to carry on business.

Rise Capital Operative Finance Private Ltd. Vs the… — Company and Corporate | Kerala HC (2019)

¶1

IN THE HIGH COURT OF KERALA AT ERNAKULAM

¶2

PRESENT

¶3

THE HONOURABLE MR. JUSTICE SHAJI P.CHALY

¶4

THURSDAY, THE 04TH DAY OF JULY 2019 / 13TH ASHADHA, 1941

¶5

WP(C).No.2763 of 2019

¶6

PETITIONER/S:

¶7

RISE CAPITAL OPERATIVE FINANCE PRIVATE LTD. TP-XVI/267 M N COMPLEX, PARAPPANANGADI ROAD, TANUR PANCHAYATH, MALAPPURAM, PIN-676 303, REPRESENTED BY ITS MANAGING DIRECTOR.

¶8

BY ADVS. SRI.GEORGE THOMAS (MEVADA)(SR.) SHRI.EDISON THOMAS T. SMT.MEGHA CHANDRAN SRI.AMAL GEORGE SRI.K.R.AVINASH (KUNNATH) SRI.MANU GEORGE KURUVILLA

¶9

RESPONDENT/S:

¶10

1 THE RESERVE BANK OF INDIA, REGIONAL OFFICE, DEPARTMENT OF NON-BANKING SUPERVISION, BAKERY JUNCTION, PB NO.6507, TRIVANDRUM-695 033, REPRESENTED BY CHAIRMAN.

¶11

2 THE CHIEF GENERAL MANAGER, RESERVE BANK OF INDIA, REGIONAL OFFICE, DEPARTMENT OF NON-BANKING SUPERVISION, BAKERY JUNCTION, PB NO.6507, TRIVANDRUM-695 033.

¶12

3 THE GENERAL MANAGER, RESERVE BANK OF INDIA, REGIONAL OFFICE, DEPARTMENT OF NON-BANKING SUPERVISION, BAKERY JUNCTION, PB NO.6507, TRIVANDRUM-695 033.

¶13

4 THE DEPARTMENT OF FINANCIAL SERVICES, MINISTRY OF FINANCE, 3RD FLOOR, JEEVAN DEEP BUILDING, SANSAD MARG, NEW DELHI-110 001, REPRESENTED BY ITS SECRETARY.

¶14

BY ADVS. R1 -R3 -SMT. SUMATHI DANDAPANI (SR.) SRI.MILLU DANDAPANI

¶15

R4 - SRI.DINESH R.SHENOY, CGC

¶16

THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 04.07.2019, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

¶17

W.P.(C) No.2763 of 2019

¶18

¶19

JUDGMENT

¶20

This writ petition is filed by the petitioner engaged in the business of lending money for interest with or without security or bond or on personal guarantees of one or more solvent individuals, and gold loans, seeking to quash Ext.P6 order passed by the 1^st respondent i.e., the Reserve Bank of India dated 23.08.2018, cancelling the certificate of registration dated 20^th May, 2015 issued to the petitioner in terms of Section 45-IA(6) of the Reserve Bank of India Act, 1934 (for brevity, 'the Act, 1934'), and for other consequential reliefs. Brief material facts for the disposal of the writ petition are as follows:

¶21

In fact, petitioner has preferred appeal

¶22

against Ext.P6 order before the Government of India and during the pendency of this writ petition, Ext.P10 order dated 27.05.2019 is passed, whereby the matter is remanded back to the primary authority for de novo consideration. Therefore, substantially the reliefs sought for by the petitioner in this writ petition are secured consequent to the disposal of the appeal during the pendency of the writ petition. However, petitioner has a case that, due to the illegal action on the part of the 1^st respondent, violative of the proviso to

¶23

W.P.(C) No.2763 of 2019

¶24

¶25

Sec.45-IA (6) of Act, 1934, petitioner is put to

¶26

serious prejudice and is unable to carry on the business.

¶27

According to the petitioner, as per Ext.P2 notification, the Reserve Bank of India has required the non-banking financial companies to have net owned fund of one hundred lakhs of rupees by 2016 and two hundred lakhs of rupees by 2017, and the petitioner maintained the target of 2016. Though it achieved Rs.200 lakhs, by December 2017 and up to March, 2018, there was a marginal shortfall of Rs.2 lakhs, and it happened because of prevailing social unrest which affected the recovery of loan amounts. While so, the Reserve Bank of India required the petitioner to send a certificate from the statutory auditor, and Ext.P3 certificate was issued confirming that as on 31.03.2018, the figure of Rs.208 lakhs is achieved. But, Ext.P4 show cause notice was issued pertaining to the marginal shortfall by 31.03.2017, and even though Ext.P5 reply was sent by email, without providing an opportunity of hearing and providing sufficient opportunity to achieve the target, as is contemplated under law, Ext.P6 order is issued cancelling the registration. It is thus aggrieved, the writ petition

¶28

W.P.(C) No.2763 of 2019

¶29

¶30

is filed. On account of the changed circumstances,

¶31

petitioner seeks an interim order to carry on with the business pending denovo consideration of the issue by the primary authority as per the directions contained in Ext.P10 order in appeal.

¶32

learned Senior Counsel for the petitioner, assisted by Advocate K.R. Avinash and Advocate Amal George, and the learned Senior Counsel Smt. Sumathi Dandapani appearing for respondents 1 to 3, and perused the pleadings and the documents on record.

¶33

The subject issue raised by the petitioner lies in a very narrow compass. As I have pointed out earlier, the appeal filed by the petitioner is allowed by the appellate authority as per Ext.P10 order and the matter is remanded back for re-consideration. However, petitioner has a case that since Ext.P6 order is passed

¶34

in absolute violation of sub-section (6) of Sec.45-IA of Act, 1934, petitioner is entitled to carry on the business. Section 45-IA deals with requirement of

¶35

registration and net owned fund, which read thus:

¶36

“ 45-IA. Requirement of registration and net owned fund .--(1) Notwithstanding anything contained in this Chapter or in any other law for the time being in force, no non-banking financial company shall commence or carry on the business of a non-banking financial institution without--

¶37

W.P.(C) No.2763 of 2019

¶38

¶39

(a) obtaining a certificate of registration issued under this Chapter; and

¶40

(b) having the net owned fund of twentyfive lakh rupees or such other amount, not exceeding two hundred lakh rupees, as the Bank may, by notification in the Official Gazette, specify.

¶41

(2) Every non-banking financial company shall make an application for registration to the Bank in such form as the Bank may specify:

¶42

Provided that a non-banking financial company in existence on the commencement of the Reserve Bank of India (Amendment) Act, 1977 shall make an application for registration to the Bank before the expiry of six months from such commencement and notwithstanding anything contained in sub-section (1) may continue to carry on the business of a non-banking financial institution until a certificate of registration is issued to it or rejection of application for registration is communicated to it.

¶43

(3) Notwithstanding anything contained in sub-section (1), a non-banking financial company in existence on the commencement of the Reserve Bank of India (Amendment) Act, 1997 and having a net owned fund of less than twenty-five lakh rupees may, for the purpose of enabling such company to fulfil the requirement of the net owned fund, continue to carry on the business of a non-banking financial institution--

¶44

(i) for a period of three years from such commencement; or

¶45

(ii) for such further period as the Bank may, after recording the reasons in writing for so doing, extend,

¶46

subject to the condition that such company shall, within three months of fulfilling the requirement of the net owned fund, inform the Bank about such fulfilment:

¶47

Provided that the period allowed to continue business under this sub-section shall in no case exceed six years in the aggregate.

¶48

W.P.(C) No.2763 of 2019

¶49

¶50

(4) The Bank, for the purpose of considering the application for registration, may require to be satisfied by an inspection of the books of the non-banking financial company or otherwise that the following conditions are fulfilled:--

¶51

(a) that the non-banking financial company is or shall be in a position to pay its present or future depositors in full as and when their claims accrue;

¶52

(b) that the affairs of the non-banking financial company are not being or are not likely to be conducted in a manner detrimental to the interest of its present or future depositors;

¶53

(c) that the general character of the management or the proposed management of the non-banking financial company shall not be prejudicial to the public interest or the interests of its depositors;

¶54

(d) that the non-banking financial company has adequate capital structure and earning prospects;

¶55

(e) that the public interest shall be served by the grant of certificate of registration to the non-banking financial company to commence or to carry on the business of India;

¶56

(f) that the grant of certificate of registration shall not be prejudicial to the operation and consolidation of the financial sector consistent with monetary stability and economic growth considering such other relevant factors which the Bank may, by notification in the Official Gazette, specify; and

¶57

(g) any other condition, fulfilment of which in the opinion of the Bank, shall be necessary to ensure that the commencement of or carrying on of the business in India by a nonbanking financial company shall not be prejudicial to the public interest or in the interests of the depositors.

¶58

(5) The Bank may, after being satisfied that the conditions specified in sub-section (4) are fulfilled, grant a certificate of

¶59

W.P.(C) No.2763 of 2019

¶60

¶61

registration subject to such conditions which it may consider fit to impose.”

¶62

Therefore, relying upon sub-section (4) of

¶63

Sec.45-IA, learned Senior Counsel for the petitioner submitted that, for the purpose of considering the application for registration, the authority is vested with powers, to inspect the books of the non-banking financial company, in order to ascertain as to whether the conditions contained thereunder are fulfilled. Therefore, the sum and substance of the contention advanced is that, such stipulations are made as a precondition for registration, solely to ensure that there is repayment capacity to the company to the depositors. But the petitioner is carrying on the business without receiving any deposit from public, and only with the fund of the shareholders. It is also pointed out that, as per sub-section (6), the Reserve Bank is vested with powers to cancel the certificate of registration granted to a non-banking financial company only if the parameters and stipulations contained under sub-section (6) of Sec.45-IA are not followed by the company, which read thus:

¶64

“( 6 ) The Bank can cancel a certificate of registration granted to a non-banking financial company under this section if such company--

¶65

W.P.(C) No.2763 of 2019

¶66

¶67

(i) ceases to carry on the business of a non-banking financial institution in India; or

¶68

(ii) has failed to comply with any condition subject to which the certificate of registration had been issued to it; or

¶69

(iii) at any time fails to fulfil any of the conditions referred to in clauses (d) to (g) of sub-section (4); or

¶70

(iv) fails--

¶71

(a) to comply with any direction issued by the Bank under the provisions of this Chapter; or

¶72

(b) to maintain accounts in accordance with the requirements of any law or any direction or order issued by the Bank under the provisions of this Chapter; or

¶73

(c) to submit or offer for inspection its books of account and other relevant documents when so demanded by an inspecting authority of the Bank; or

¶74

(v) has been prohibited from accepting deposit by an order made by the Bank under the provisions of this Chapter and such order has been in force for a period of not less than three months:

¶75

Provided that before cancelling a certificate of registration on the ground that the non-banking financial company has failed to comply with the provisions of clause (ii) or has failed to fulfil any of the conditions referred to in clause (iii) the Bank, unless it is of the opinion that the delay in cancelling the certificate of registration shall be prejudicial to public interest or the interest of the depositors or the non-banking financial company, shall give an opportunity to such company on such term as the Bank may specify for taking necessary steps to comply with such provision or fulfilment of such condition:

¶76

Provided further that before making any order of cancellation of certificate of registration, such company shall be given a reasonable opportunity of being heard.”

¶77

W.P.(C) No.2763 of 2019

¶78

¶79

The paramount and predominant contention

¶80

advanced by learned Senior Counsel is that, even assuming that there was marginal shortfall on the part

¶81

of the petitioner to achieve the target, before cancelling a certificate of registration on the ground that the non-banking financial company has failed to comply with the provisions of clause (ii) above or has failed to fulfil any of the conditions referred to in

¶82

clause (iii), the Bank, unless it is of the opinion that the delay in cancelling the certificate of registration shall be prejudicial to public interest or the interest of the depositors or the non-banking financial company, “shall” give an opportunity to such company on such term as the Bank may specify for taking necessary steps “to comply with such provision or fulfilment of such condition”. The thrust of the contention advanced by the learned Senior Counsel is dependent on the said proviso, by which the cancellation may be done by the Reserve Bank of India only after providing an opportunity to the company for taking necessary steps to comply with the provisions discussed above or fulfilment of such conditions.

¶83

On the other hand, learned Senior Counsel appearing for the 1^st respondent submitted that, since

¶84

W.P.(C) No.2763 of 2019

¶85

¶86

the appeal filed by the petitioner is allowed by the

¶87

appellate authority and remanded the matter back, petitioner is at liberty to take up all these

¶88

contentions before the primary authority.

¶89

Having evaluated the rival submissions made

¶90

across the Bar, I am of the considered opinion that, while issuing Ext.P6, there was fundamental flaw on the

¶91

part of the 1^st respondent by not providing an opportunity to the petitioner to comply with the

¶92

proviso to sub-section (6) of Sec.45-IA of Act, 1934. It is clear from the documents produced and the

¶93

pleadings put forth by the petitioner that such fundamental and valuable right available to the

¶94

petitioner was overlooked by the 1^st respondent. Therefore, in my considered view, there was clear violation of the principles of natural justice, which were statutorily prescribed to be followed by the 1^st respondent, and therefore, Ext.P6 becomes arbitrary and illegal. Moreover, the basic allegation raised by the

¶95

petitioner is that in order to comply with the conditions prescribed under Sec.45-IA of Act, 1934, for the year 2016-2017, from December, 2016 up to 31^st

¶96

March, 2017, there was only a marginal shortfall of Rs.2 lakhs. However, according to the petitioner, the

¶97

W.P.(C) No.2763 of 2019

¶98

¶99

target was achieved by the petitioner and raised the figure to Rs.208 lakhs evident from the certificate forwarded by the Chartered Accountants on 15.05.2018.

¶100

Therefore, in my considered view, the failure on the part of the respondents to follow the peremptory stipulation contained under the proviso to Sec.45-IA (6) has seriously prejudiced the activities of the petitioner and I am prima facie of the opinion that petitioner is to be permitted to carry on the business pending re-consideration of the matter in accordance with the direction contained in Ext.P10 order passed by the appellate authority. I find that there is manifest error, irregularity and arbitrariness on the part of the 1^st respondent in cancelling the registration. So also, no opportunity of hearing was provided to the petitioner and going by the provisions of the Act, 1934, it is vivid and clear that the statute

¶101

contemplates the authority to follow the principles of natural justice.

¶102

Therefore, the writ petition is allowed to the above extent, and there will be a direction to the 1^st respondent to re-consider the matter in accordance with the directions contained in Ext.P10 order passed by the appellate authority and in accordance with the

¶103

W.P.(C) No.2763 of 2019

¶104

¶105

provisions of Act, 1934, after providing an opportunity

¶106

of hearing and participation to the petitioner at the earliest. Till such time, petitioner shall be

¶107

permitted to carry on with the activities in accordance with law.

Sd/-

SHAJI P.CHALY

JUDGE

St/06.07.2019

W.P.(C) No.2763 of 2019

¶113

¶114

APPENDIX

¶115

PETITIONER'S/S EXHIBITS:

¶116

EXHIBIT P1	TRUE PHOTOCOPY OF THE CERTIFICATE OF REGISTRATION BEARING NO.B-16.00108 DATED 20.5.2015.
EXHIBIT P2	TRUE PHOTOCOPY OF THE NOTIFICATION NO.DNBR.007/CGM (CDS)-2015 ISSUED BY THE IST RESPONDENT DATED 27.3.2015.
EXHIBIT P3	TRUE PHOTOCOPY OF THE CERTIFICATE ISSUED BY THE CHARTERED ACCOUNTANTS M/S. DAVY & CO. DATED 15.5.2018.
EXHIBIT P4	TRUE PHOTOCOPY OF THE SHOW CAUSE NOTICE DATED 18.7.2018.
EXHIBIT P5	TRUE PHOTOCOPY OF THE REPLY SENT BY THE PETITIONER DATED 8.8.2018.
EXHIBIT P6	TRUE PHOTOCOPY OF THE ORDER BY THE 2ND RESPONDENT DATED 23.8.2018.
EXHIBIT P7	TRUE PHOTOCOPY OF THE COMMUNICATION BY THE 3RD RESPONDENT DATED 23.8.2018.
EXHIBIT P8	TRUE PHOTOCOPY OF THE APPEAL TO THE DEPARTMENT OF FINANCIAL SERVICES, THE MINISTRY OF FINANCE AT NEW DELHI.
EXHIBIT P9	TRUE PHOTOCOPY OF THE NOTICE ISSUED BY THE HDFC BANK TO THE PETITIONER DATED 18.12.2018.
EXHIBIT P10	TRUE COPY OF THE ORDER DATED 27/5/2019 F.NO.25/126/2019/BOA-II
EXHIBIT P11	TRUE COPY OF THE REPRESENTATION MADE BY THE PETITIONER BEFORE THE 1ST RESPONDENT.

¶117

RESPONDENTS' EXHIBITS: NIL

¶118

//TRUE COPY//

¶119

P.S. TO JUDGE

¶120

St/-

Rise Capital Operative Finance Private Ltd. v. the Reserve Bank of India

Case brief

What is this about?

What did the court decide?

Rise Capital Operative Finance Private Ltd. v. the Reserve Bank of India

Case brief

What is this about?

What did the court decide?

What the court decided

A compact analysis

Issues for consideration

Statutes considered

Parties & counsel

Coram

Case details

Similar cases

Suresh Vs Athul Swamyanath

P.N.Govindan Vs Toby Thomas

M.Asokan Vs the Land Revenue Commissioner

Lucy Sebastian Vs the Deputy Tahsildar, Kanayannur Taluk

James.K.Mathew, Vs District Collector

Kerala Self Financing Polytechnic College Vs State of Kerala