Background
Supreme Court, in the case of Nedumpilli Finance Company Limited V. State Of Kerala & Ors., has delivered an important judgment on May 10, 2022. The issue in question was whether the NBFCs could also be regulated by State enactments such as Kerala Money Lenders Act, 1958 and Gujarat Money Lenders Act, 2011.
The State Governments across India have passed multiple legislations for regulating the money-lending practices. Some of the legislations are passed even before the NBFCs were recognised and some are more recent. While these legislations exclude the Banks from their purview, no express exclusions are usually provided for NBFCs. This led to some State Governments insisting that NBFCs register themselves under these legislations.
Overview
The Supreme Court held that the state legislatures are competent to enact legislations for regulating borrowing. The Court noted the various objectives of the legislations a well. The Court then proceeded to note the evolution and scheme of the Chapter III-B of the Reserve Bank of India Act, 1934. It noted that ‘the power of intervention available for the RBI over NBFCs, is from the cradle to the grave’. The provisions of the Section 45Q which gives overriding powers to the provisions of the Chapter III-B were found to be very crucial by the Court. The decision was based on these crucial arguments.
Important observations of the Supreme Court
A few noteworthy observations by the Court are as follows:
- Once it is found that Chapter IIIB of 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 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 of Chapter IIIB. [Para 6.19]
- If a statutory enactment which provides for such a type of control and supervision is not a complete code in itself, we do not know what else could be a complete code. [Para 7.1]
- The moment the Parliament stepped in to codify the law relating to registration and regulation of NBFCs, by inserting certain provisions in Chapter IIIB of the RBI Act, the same would cast a shadow on the applicability (even assuming it is applicable) of the provisions of the Kerala Act to NBFCs registered under the RBI Act and regulated by RBI. [Para 8]
- Once it is admitted that the RBI Act is traceable to an entry in List I, Article 246(1) comes into play. In any case, there are also areas of conflict. [Para 9.1]
- [W]e 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. [Para 11]
- Though we have not examined the provisions of the Tamil Nadu Pawn Brokers Act and the Tamil Nadu Money Lenders Act, the principles of law laid down herein, would apply equally to these State enactments also. [Para 11.2]
This decision gives ample clarity to the NBFCs for their operations which span multiple states. The complete decision can be read here.
– Team Efficax