NEDUMPILLI FINANCE COMPANY LIMITED v. STATE OF KERALA & Ors.

To find out whether NBFCs registered under Chapter III-B of the RBI Act and regulated by RBI could still be controlled by the State enactments, because of the definition of the expression “money lender”, the Court first have to see whether Chapter III-B of the RBI Act is a complete code or not. [Para 7][1039-C-D]

No NBFC can commence or carry on business without obtaining the certificate of registration under the Act. Their continuation in business would depend upon compliance with certain prescriptions found in the RBI Act as well as the circulars/ directions issued by 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, the court does not know what else could be a complete code. In Integrated Finance Company Limited vs. Reserve Bank of India and Others, this Court held in para 47 of the Report that “Chapter III-B of the RBI Act is a complete code in itself”. [Paras 7 and 7.1][1039-D-F] A B C D E F G H 1010 SUPREME COURT REPORTS [2022] 7 S.C.R.

It may be true that many times RBI may not be controlling the rate of interest charged by NBFCs on the loans advanced by them. It does not mean that they have no power to step in. The power to determine policy and issue directions, available under Section 45-JA can always be invoked by RBI.[ Para 7.4][1040-C-D]

Section 45L(1)(b) confers power upon the RBI to give directions to NBFCs “relating to the conduct of business by them”. Therefore, to say that RBI has no power in respect of such an important aspect, may not be correct. The fact that RBI generally leaves it to the market forces to determine the rate of interest, without any direct intervention, is not something that could be taken advantage of by the State of Kerala to step in and prescribe the maximum rate of interest chargeable by NBFCs on the loans advanced by them. [Para 7.8][1041-A-B]

In Deep Chand v. State of U.P., the Constitution Bench of this Court reiterated three important tests of inconsistency or repugnancy, namely, (i) whether there is direct conflict between the two provisions; (ii) whether Parliament intended to lay down an exhaustive Code in respect of the subject matter replacing the Act of the State legislature; and (iii) whether the law made by Parliament and the law made by State legislature occupy the same field. Therefore, more than supporting the case of the State, Deep Chand actually supports the case of the NBFCs, as we have found that Chapter III-B is a complete code in itself. [Para 7.9][1041- C-D] Doctrine of Eclipse, conflict and repugnancy

As indicated by the Constitution Bench in Deep Chand , a law may be valid when made, but a shadow may be cast on it by supervening constitutional inconsistency or supervening existing statutory inconsistency. 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 to Entry 30 of List II, it has to give way for the parliamentary enactment. The moment the Parliament stepped in to codify the law relating to registration and regulation of NBFCs, by inserting certain provisions in Chapter III-B of the RBI Act, the same would cast a shadow on A B C D E F G H NEDUMPILLI FINANCE COMPANY LIMITED v. STATE OF KERALA & ORS. 1011 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][1041-E-F]

This Court held that repugnancy under Article 254 would arise only if both the Parliamentary law and the State law are referable to List-III. Once it is clear that the RBI Act is traceable only to the Entries in List-I and the State enactments are traceable only to an Entry in List-II, the question of repugnancy under Article 254 does not arise, as has been held in Innoventive Industries Limited. But in cases of this nature, Article 246(1) would squarely apply. [Paras 8.2, 8.3][1044-B-D] Is the argument of Conflict, a mirage?

It was argued on behalf of the State that without pointing out any area of conflict between the two enactments the NBFCs cannot invoke either Article 246 or Article 254. [Para 9][1045- D]

But the above argument has no substance. 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][1045-D-E] Overriding Effect

Section 45-Q which confers overriding effect upon Chapter III-B, over other laws. Therefore, the States of Gujarat and Kerala cannot contend that the laws made by them are in addition to the provisions of Chapter III-B. [Para 10][1046-B]

Though it was contended by the learned counsel appearing for the State of Gujarat that the Gujarat Act exempts NBFCs registered under the RBI Act from seeking registration under the Gujarat Act, the same would go to the rescue of State of Gujarat. Under Section 5(2) of the Gujarat Act, NBFCs registered under the RBI Act are deemed to have been registered under the Gujarat Act. Therefore, all other provisions of the Gujarat Act are sought to be applied to NBFCs operating in the State of Gujarat. The other provisions of the Gujarat Act include the (i) power of search and seizure; (ii) requirement to A B C D E F G H 1012 SUPREME COURT REPORTS [2022] 7 S.C.R. maintain certain books and registers and to furnish statements; and (iii) the mandate not to dispose of any article taken from a debtor as a pawn, pledge or security, before a period of two years from the date stipulated for final payment, etc. The Gujarat Act also empowers the Civil Court under Section 30 to reopen certain transactions and to limit the interest recoverable. Section 32 of the Gujarat Act empowers the borrower to deposit the money before a Civil Court and the civil Court to assume jurisdiction of the adjudication of the dispute. Interestingly, Gujarat Act, 2011 tacitly recognizes the regulation of NBFCs under the RBI Act. Yet the State got the assent of only the Governor. [Paras 10.1, 10.2][1046-C-F]

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 the judgment of the Gujarat high Court are dismissed. [Para 11][1046-G] Deep Chand vs. State of U.P. AIR 1959 SC 648 : [1959] Suppl. SCR 8 – followed.