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Wednesday, May 11, 2022

Supreme Court upholds RBI remit over NBFCs, says state laws won’t apply

Non-banking financial companies (NBFCs) will be regulated by the Reserve Bank of India (RBI), and state money-lending laws will have no applicability on them, the Supreme Court (SC) said on Tuesday.

The question before the SC was whether NBFCs regulated by the RBI, in terms of the provisions of Chapter IIIB of the Reserve Bank of India Act, 1934, could also be regulated by state enactments like the Kerala Money Lenders Act, 1958 and the Gujarat Money Lenders Act, 2011, with the Kerala and Gujarat High Courts taking opposite views. While the Gujarat HC had in 2011 held NBFCs would not fall under the purview of the Bombay Money Lenders Act, as applicable in the state, the Kerala High Court had given contrary findings, holding that the money-lending laws of the state were applicable.

Clarifying the contrary findings in a batch of cases led by Nedumpilli Finance Company vs Kerala, an apex bench comprising Justices Hemant Gupta and V Ramasubramanian held that “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 the appeals filed by NBFCs against the judgment of the Kerala High Court are allowed. Likewise, the appeals filed by the State of Gujarat against its high court judgment are dismissed.” Though the SC did not examine the provisions of the Tamil Nadu Pawn Brokers Act and the Tamil Nadu Money Lenders Act, it clarified that the principles of law laid down in the NBFCs’ case “would apply equally to these state enactments also”.

Welcoming the judgment, former Finance Industry Development Council chairman, Raman Aggarwal, said “this settles a long-lasting issue being faced by NBFCs that were faced with dual regulation by the RBI and the state governments, which was totally imprudent”. He said, “Chapter III B of RBI Act is a complete code in itself and there is a clear conflict between RBI Act and Money Lenders Act which cannot be reconciled. Sec. 45Q of RBI Act has an overriding effect over the state money-lenders laws. The state has no power to regulate the money-lending business of NBFCs.”

The SC said that while the state enactments regulating the business of money-lending has a one-eyed focus only to protect borrowers, the RBI Act takes a holistic approach to the business of banking, money-lending and operation of the currency & credit system of India.

The judges said no NBFC can start or carry on business without obtaining a certificate of registration under the RBI Act; their continuation in business would depend upon compliance with the RBI Act and circulars/directions issued by the RBI.

“The RBI has the power to supersede the Board of Directors of a NBFC and has power even to wind up a NBFC. Thus the supervision and regulation of NBFCs, by the RBI, is from the time of birth till the time of death. 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,” the judgment stated, adding that to say that the RBI has no say in such a matter of vital interest will strike at the very root of the statutory control vested in RBI.



from "Banking & Finance News: Banking & Finance News Today, Indian Banking & Finance News, World Banking & Finance News Today - The Financial Express " | The Financial Express https://ift.tt/nWr0Rio

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