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C/SCA/645/2014 CAV JUDGEMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION NO. 645 of 2014 With SPECIAL CIVIL APPLICATION NO. 10120 of 2014 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE AKIL KURESHI Sd/- and HONOURABLE MR.JUSTICE J.B.PARDIWALA Sd/- ================================================================
1 Whether Reporters of Local Papers may be allowed to see Yes the judgment ?
2 To be referred to the Reporter or not ? Yes 3 Whether their Lordships wish to see the fair copy of the No judgment ?
4 Whether this case involves a substantial question of law as No to the interpretation of the Constitution of India, 1950 or any order made thereunder ?
5 Whether it is to be circulated to the civil judge ? No ================================================================ IONIC METALLIKS & 3....Petitioner(s) Versus UNION OF INDIA & 3....Respondent(s) ================================================================ Appearance:
MR MASOOM K SHAH, ADVOCATE for the Petitioner(s) No. 1 - 4 MR VISHWAS K SHAH, ADVOCATE for the Petitioner(s) No. 1 - 4 MR MITUL SHELAT, ADVOCATE for the Petitioner. MR S.N.SOPARKAR, SR.ADVOCATE with MR AMAR N BHATT, ADVOCATE for the Respondent(s) No. 4 MS NALINI S LODHA, ADVOCATE for the Respondent(s) No. 2 - 3 Page 1 of 162 C/SCA/645/2014 CAV JUDGEMENT NOTICE SERVED BY DS for the Respondent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE J.B.PARDIWALA Date :09/09/2014 CAV JUDGEMENT (PER : HONOURABLE MR.JUSTICE J.B.PARDIWALA) Since the legal issues raised in both the writ applications are more or less the same, those were heard together and are being disposed of by this common judgment.
The challenge in both the above captioned writ applications is to the legality and validity of a Master Circular dated 2nd July 2012 issued by the Reserve Bank of India in respect of 'willful defaulter' and the notices were issued by the respective banks, calling upon the petitioners to show-cause as to why they should not be declared as willful defaulters in terms of the Reserve Bank of India's Master Circular.
Special Civil Application No.645 of 2014 :
The petitioner no.1 is a proprietary firm. The petitioner no.2 is a company registered under the Indian Companies Act, 1956, having its Registered Office within the State of Gujarat. The petitioner no.3 is the Director of the petitioner no.2 Company and the petitioner no.4 is the Guarantor and also a Director of the Petitioner no.2 Company.
The petitioners availed of a loan facility from the Page 2 of 162 C/SCA/645/2014 CAV JUDGEMENT respondent no.2 Punjab National Bank. The respondent no.2 Bank noticed that the loan account of the petitioners was a Non-Performing Asset (NPA) since 30th June 2012 with the outstanding of Rs.1027 lac (as on the date of the NPA) including the interest at the applicable rate.
Despite regular reminders from the bank for payment of the dues, no steps were taken by the petitioners in that regard. Therefore, the respondent no.2 Bank issued a show-cause notice dated 19th February 2013 followed by a second show- cause notice dated 14th May 2013 and a final notice dated 8th January 2014 on the premise that the petitioners had defaulted in repayment of the loan amount and the funds borrowed from the Bank were siphoned off and not used for the purpose for which the amount of the loan was disbursed, for which the petitioners were called upon to show-cause as to why they should not be declared as 'willful defaulters' in terms of the RBI Master Circular DBOD No.CID-
BC.1/20.16.2003/2011-12.
Such action of the Bank is the subject matter of challenge in the petition including a prayer to declare the RBI Master Circular dated 2nd July 2012 referred to above as ultra vires the Constitution of India and/or the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Act No.54 of 2002) and/or the Reserve Bank of India Act, 1934 and/or the Banking Regulation Act, 1949 and/or the Recovery of Debts Due to Bank and Financial Institutions Act, 1993 and/or the Credit Information Companies (Regulation) Act, 2005 and/or the Indian Contract Act.
Page 3 of 162C/SCA/645/2014 CAV JUDGEMENT Special Civil Application No.10120 of 2014 :
The petitioners availed of the facility of the Home Saver Account vide sanction letter dated 30th September 2010 to the tune of Rs.3,45,87,900/- in Account No.48111724 from the respondent no.2 - Standard Chartered Bank. The petitioners availed one more facility of the Home Saver Account by sanction letter dated 30th September 2010 of Rs.1,45,12,100/- vide Account No.48134899 from the respondent no.2 - Standard Chartered Bank. The Account No.48134899 was declared as NPA on 1st December 2013 whereas the Account No.48111724 was declared as NPA on 10th January 2013.
On 3rd April 2014, the petitioners addressed a letter to the respondent no.2 Bank requesting for a closure of both the accounts.
On 20th May 2014, the petitioners were served with the notices under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
On 20th June 2014, the petitioners were served with the impugned notices under the RBI Circular DBOD No.CID.BC.1/20.16.2003/2011-12 dated 1st July 2012, calling upon them to show-cause as to why they should not be declared as the willful defaulters. The petitioners replied to the said notices on 1st July 2014.
In the aforesaid background, the petitioners have prayed to declare the RBI Master Circular dated 1st July 2011 as ultra Page 4 of 162 C/SCA/645/2014 CAV JUDGEMENT vires the Constitution of India and various other enactments. The petitioners have also prayed that the notice dated 20th June 2014 issued by the Respondent no.2 Bank under the RBI Master Circular be also quashed and set-aside.
Submissions on behalf of the petitioners :
Mr.Vishwas Shah and Mr.Mitul Shelat, the learned advocates appearing for the respective petitioners made the following submissions :
The RBI Master Circular dated 1st July 2011 as well as the RBI Master Circular dated 2nd July 2012 in respect of the willful defaulters and the instructions contained therein are beyond the legislative competence of the RBI. The circular does not refer to any provision of law under which it has been issued.
It has been submitted that the stance of the Reserve Bank of India that issuance of the Master Circular is in exercise of the powers conferred under Section 21 and Section 35-A of the Banking Regulation Act, 1949, is completely misplaced and erroneous. To fortify such submission, strong reliance has been placed on the decision of the Supreme Court in the case of Indian Banks' Association, Bombay and others v. M/s.Devkala Consultancy Service and others, (2004)11 SCC 1.
The impugned provisions of the Circular are substantive provisions affecting the rights of the citizens. The substantive provisions can only be by way of a legislative enactment and not by exercise of powers to issue directions.
Page 5 of 162C/SCA/645/2014 CAV JUDGEMENT It is submitted that to prescribe a particular conduct by a borrower as a "willful default", to impose the penalty for such a "willful default" and to prescribe a procedure for adjudication of the lis regarding the "willful default" are beyond the scope and ambit of Section 35(A) of the Banking Regulation Act, 1949.
The Chief General Manager has no power, authority and locus to issue the Master Circular, however, the circular issued by the Chief General Manager would not constitute a policy decision under Sections 21 and 35A of the Banking Regulation Act, 1949. The said Circular is required to have the phrase "in public interest" or "in interest of depositors" or "in interest of banking policy" and should indicate relevant materials and reasons that the Circular was being issued after considering the interest of all the above and for such reasons.
In support of such submission, strong reliance has been placed on a decision of the Karnataka High Court in the case of E.Sathyanarayanan and others v. Reserve Bank of India and others, reported in (2002)112 Company Cases 272.
The impugned Circular is violative of Article 14 of the Constitution as it has the effect of almost blacklisting the petitioners from obtaining any new loan from any other bank or financial institution and it attaches a social stigma on the Directors who may not be concerned in any manner as regards the day-to-day affairs and management of the company.
It is submitted that none of the provisions of the Reserve Bank of India Act or the Banking Regulation Act, 1949 confers any power upon the Reserve Bank of India to impose any Page 6 of 162 C/SCA/645/2014 CAV JUDGEMENT penalty relating to a particular conduct of a borrower. The circular confers uncanalized, unbridled and untrammeled power upon the banks to decide the future of any borrower and makes the bank a judge in its own cause and also the decision whether the other banks should lend money to the borrower declared as a willful defaulter.
According to the learned advocates appearing on behalf of the petitioners the policy decision of the Reserve Bank of India in the form of a Master Circular is nothing but a direct infringement of Article 19(1)(g) of the Constitution which provides for right to trade, business or profession. A person may fail in one business, but he cannot be debarred or prohibited from doing any other business for which he may have to raise the necessary funds by obtaining loan from a bank or any other financial institution.
The Circular pre-supposes a default, which is otherwise required to be proved in accordance with law before the Debts Recovery Tribunal established under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (Act No.51/1993) or any other competent forum. The word "debt" is defined under Section 2(g) of the RDBI Act, 1993. The question whether there exists any debt or not is a question the bank is obliged to prove and satisfy before the Debts Recovery Tribunal under the RDBI Act, 1993, against the borrower. It has been submitted that the impugned circular which seeks to delegate the function of making a judicial inquiry and issue a declaration regarding the conduct of a borrower as a "willful default" entails serious consequences. Such adjudication is essentially judicial in nature as it involves adjudication of a lis.
Page 7 of 162C/SCA/645/2014 CAV JUDGEMENT Such an essential primary function cannot be delegated to a non-judicial authority like a private bank or even a nationalized bank.
In support of such submission, strong reliance has been placed on the decision of the Supreme Court in the case of Ram Prasad Narayan Sahi and another v. State of Bihar and others, AIR 1953 SC 215, and Sadasib Prakash Brahmchari, Trusty of Mohiprakash Math v. State of Orissa, AIR 1956 SC
432. The provisions of the impugned circular violate the doctrine of "due process" and the concept of a "just, fair and reasonable law". The doctrine of due process is enshrined in Article 21 of the Constitution of India. In support of such submission, strong reliance has been placed on the decisions of the Supreme Court in the case of (i) Directorate of Revenue and another v. Mohammed Nisar Holia, (2008)2 SCC 370; (ii) State of Punjab v. Dalbir Singh, (2012)3 SCC 346; (iii) State of Karnataka v. Shri Rameshwara Rice Mills Thirthahalli, (1987)2 SCC 160 and (iv) M/s.J.G.Engineers Pvt. Ltd. v. Union of India and another, (2011)5 SCC 758.
Challenge to the validity of the Notice :
Apart from the challenge to the Constitutional validity of the Master Circular issued by the Reserve Bank of India, the petitioners have also challenged the proposed action on the part of the Bank.
It has been vehemently submitted by the learned Page 8 of 162 C/SCA/645/2014 CAV JUDGEMENT advocates appearing on behalf of the petitioners that having regard to the contents of the notice it could be said that the Bank has already taken a decision to declare the petitioners as willful defaulters without disclosing any reasons in the show- cause notice and the show-cause notice is also bereft of the necessary particulars and details. In the absence of the necessary details and the reasons, the petitioners would not be able to effectively put forward their case.
Mr.Mitul Shelat, the learned advocate appearing for the petitioners of Special Civil Application No.10120 of 2014, submitted that although the impugned action is at the instance of a private bank, viz. Standard Chartered Bank, yet the same figures as a scheduled bank in the Second Schedule of the Reserve Bank of India Act, 1934, and therefore, would be amenable to the writ jurisdiction of this Court under Article 226 of the Constitution so far as the challenge to the notice is concerned.
In support of his submission that the Standard Chartered Bank is amenable to the writ jurisdiction of this Court under Article 226 of the Constitution being a State or an instrumentality of a State within the meaning of Article 12 of the Constitution of India, Mr.Shelat has placed reliance on the following decisions :
(i) Shri Anandi Mukta Sadguru Shree Muktajee Vandasjiswami Survarna Jayant Smarak Trust Vs. V.R. Rudani, AIR 1989 SC 1707;
(ii)Praga Tools Corporation v. C.A. Imanual and others, AIR 1969 SC 1306;Page 9 of 162
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(iii) Apex Electricals v. ICICI Bank Ltd., 2003(2) GLR 1785;
(iv) M/s A-One Mega Mart Pvt. Limited and others v. HDFC Bank and another, (2013)169 Punjab Law Reporter 688;
(v) M/s. Inder Surgical v. Union of India and others, 2014(2) Punjab Law Reporter 377.
In such circumstances referred to above, it has been prayed that the petitions merit consideration and the reliefs prayed for in the respective petitions be granted.
Stance of the Reserve Bank of India :
In response to the notice served upon the Reserve Bank of India, an affidavit-in-reply has been filed in the Special Civil Application No.645 of 2014 on behalf of the same duly sworn by its Assistant General Manager, Department of Banking Supervision, Reserve Bank of India, Ahmedabad. The stance of the Reserve Bank of India as could be deduced from the averments made in the reply is thus :-
The petition is not maintainable against the Reserve Bank of India. There is no violation of any fundamental, legal or statutory rights of the petitioners by the RBI. The RBI has been constituted by the Reserve Bank of India Act, 1934, inter alia, for regulating the issue of bank notes and for keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage. The RBI acts as the central bank of the country, exercises supervisory and regulatory powers as Page 10 of 162 C/SCA/645/2014 CAV JUDGEMENT contemplated under the Reserve Bank of India Act, 1934 (RBI Act) as well as the Banking Regulation Act, 1949 (BR Act). The RBI has been conferred with the power to determine policy in relation to advances to be followed by banking companies. The RBI is conferred with wide powers for issue of directions/guidelines to banks under the provisions of the Banking Regulation Act, 1949. It is the duty of the RBI to ensure development of banking in India in an orderly manner. As the banking regulator and supervisor in the country, the RBI has been issuing guidelines/directions to banks from time to time, and the banks are duty bound to implement the same.
Section 5(ca) of the Banking Regulation Act defines "banking policy" as any policy which is specified from time to time by the Reserve Bank of India in the interest of the banking system or in the interest of monetary stability or sound economic growth, having due regard to the interests of the depositors, the volume of deposits and other resources of the bank and the need for equitable allocation and the efficient use of these deposits and resources. Section 6 of the Banking Regulation Act specifies the forms of business in which banking companies may engage.
In terms of Section 21 of the Banking Regulation Act, where the RBI is satisfied that it is necessary or expedient in the public interest or in the interests of depositors or banking policy so to do, it may determine the policy in relation to the advances to be followed by the banking companies generally or by any banking company in particular and the concerned banking companies shall be duty bound to follow the policy so determined.
Page 11 of 162C/SCA/645/2014 CAV JUDGEMENT In terms of Section 22 of the Banking Regulation Act, no company can carry on banking business in India, unless it holds a license issued in that behalf issued by the RBI. In terms of Section 22(4) of the Banking Regulation Act, the RBI can cancel the license of the banking company. In terms of Section 35 of the Banking Regulation Act, the RBI has the power to conduct statutory inspection of any banking company or cause a scrutiny of the affairs of a banking company and its books of accounts.
The RBI has the powers to issue directions under Section 35A of the Banking Regulation Act to the banking companies generally or to any banking company in particular in public interest or in the interest of the banking policy or to prevent the affairs of the banking company being conducted in a manner detrimental to the interest of its depositors or in a manner prejudicial to the interest of the banking company. The Banking Regulation Act envisages action to be taken by the RBI when RBI is satisfied that circumstances warrant such action. Section 36(1) of the Banking Regulation Act empowers the RBI to caution or prohibit banks against entering into certain transactions and generally give advice to any bank.
As regards the issuance of directions/guidelines/ circulars etc. by the RBI, the necessary actions as empowered under the law and as considered appropriate and essential in a given situation have always been issued from time to time keeping in view the larger interest of a banking company, its depositors and the banking sector as a whole.
Page 12 of 162C/SCA/645/2014 CAV JUDGEMENT The former Finance Minister, in his budget speech in February 1994, had announced that in order to alert the banks and financial institutions and put them on guard against the borrowers who had defaulted in their dues or other lending institutions, the RBI was putting in place arrangements for circulating amongst the banks/financial institutions, the names of defaulting borrowers above a threshold limit. The objective of putting such a reporting mechanism in place was to arrest the increase of Non-Performing Assets of the banks. He had further mentioned that the RBI would also publish a list of defaulting borrowers against whom suits had been filed by banks and FIs.
In April 1994, the Reserve Bank of India framed a scheme of Disclosure of Information on Defaulting Borrowers of Banks and the Financial Institutions (FIs) for collection/dissemination of information from/to "banking companies". The "banking company" for the purpose also includes the "financial institutions" that may be notified by the Central Government in this behalf. Under the Scheme, the banks and the notified FIs were advised on 23rd April 1994 to furnish to the RBI the prescribed details of defaulting borrowers with outstanding amount (both funded and non-funded) of one crore and above which were classified as 'Doubtful' and/or 'Loss' and suit filed accounts on half yearly basis (September and March). The Scheme had the following objectives;
i) To alert the banks and FIs and to put them on guard against the borrowers who had defaulted in their dues to other lending institutions.Page 13 of 162
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ii) To make public the name of the defaulting borrowers against whom suits had been filed by the banks/FIs.
At a meeting convened by the Central Vigilance Commission with the bankers on 24th November 1998, it was decided that the banks would report all cases of willful default of Rs.25 lac and above to the RBI, which in turn, would circulate such lists to all banks on a quarterly basis. Pursuant to the instructions of the Central Vigilance Commission, the RBI introduced a scheme under which banks and notified All India Financial Institutions were required to submit to the RBI the details of willful defaulters with outstanding of Rs.25 lac and above. The Scheme came into force with effect from 1st April 1999. Accordingly, banks and financial institutions started reporting such cases of willful defaults which occurred or were detected after 31st March 1999 on a quarterly basis to the RBI.
Taking into consideration the concern expressed over the persistence of the 'willful default' in the financial system in the 8th Report of the Parliament's Standing Committee on Finance (Standing Committee), the RBI, in consultation with the Government of India, constituted a Working Group on Willful Defaulters (WGWD) under the Chairmanship of Shri S.S.Kohli, the then Chairman of the Indian Banks' Association in May 2011 for examining some of the recommendations of the 8th Report on the Parliament's Standing Committee on Financial Institutions. The Group submitted its report in November 2001. The recommendations of the Working Group of Willful Defaulters were further examined by an In-House Working Group constituted by the RBI. Accordingly, the banks/financial Page 14 of 162 C/SCA/645/2014 CAV JUDGEMENT institutions were advised on 30th May 2002 for implementation of such recommendations with immediate effect.
Pending the passing of the legislation in respect of Credit Information Companies, the RBI, in terms of its circular DBOD No.DL.BC.11/20.16.001/2001-02 dated 4th June 2002, advised the banks and financial institutions to submit a list of willful defaulters (of suit filed accounts) of Rs.25 lac and above as on 31st March 2003 onwards, to the Credit Information Bureau (India) Ltd. (hereinafter referred to as "CIBIL") only and not to the RBI. The RBI continues to disseminate exclusively to the banks and financial institutions for their confidential use the credit information regarding willful defaulters of Rs.25 lac and above (non-suit filed accounts) in a consolidated manner as reported for the purpose by the banks and financial institutions.
The Reserve Bank has been issuing various circulars from time to time to the scheduled commercial banks and All India Notified Financial Institutions with regard to dissemination of credit information pertaining to the willful defaulters for cautioning the banks and the financial institutions including action required to be taken against the willful defaulters. All these circulars were consolidated in the Master Circular on Willful Defaulters dated 1st July 2013 (Master Circular) issued by the RBI. The Master Circular was prepared to ensure that all the existing instructions on the subject were incorporated and consolidated in a single document and are available for the use of the banks and the financial institutions as also on the website of the RBI. The Circular on Willful Defaulters has Page 15 of 162 C/SCA/645/2014 CAV JUDGEMENT been issued by the RBI under Sections 21 and 35A of the Banking Regulation Act, 1949 and are mandatory and binding on the banks.
The Master Circular on Willful Defaulters contains definition of the term "willful defaulter" and it also provides guidance as to how the terms "diversion of funds" and "siphoning of funds" are to be construed in the case of "willful default". The Master Circular specifically requires the banks and financial institutions (FIs) to put in place a transparent mechanism for the entire process so that the provisions of the Master Circular are not misused and the scope of the discretionary powers conferred upon the banks and FIs are kept to the barest minimum. The Master Circular also requires the banks and FIs to ensure that a solitary or isolated instance is not made the basis for imposing any penalty on the willful defaulters. The Master Circular clearly prescribes the measures required to be adopted by the banks and FIs in identifying and reporting the instances of willful default. Paragraph 3 of the Master Circular stipulates that the decision to classify a borrower as willful defaulter should be entrusted to a committee of higher functionaries of the bank/FI concerned headed by the Executive Director and consisting of two GMs/DGMs as decided by the Board of the Bank/FI. Further, the decision taken on classification of the willful defaulters should be well documented and supported by requisite evidence and should clearly spell out the reasons for which the borrower has been declared as willful defaulter in terms of the guidelines issued by the Bank. The bank/FI is also required to advise the borrower concerned about the proposal to classify him as willful defaulter along with the reasons Page 16 of 162 C/SCA/645/2014 CAV JUDGEMENT therefor. The bank/FI is also required to provide a reasonable time to the borrower for making representation against the decision to a committee headed by the Chairman and Managing Director of the bank/FI concerned. The Bank has prescribed a detailed procedure for classification of a particular borrower as a willful defaulter and such classification is required to be done by the higher authorities in the bank/FI concerned with a second screening at the level of the highest authority when a representation is made by the borrower. The procedure prescribed by the Bank provides ample opportunity to the borrower to present their case before the highest authorities in the bank/FI concerned before a decision is taken on his classification as a willful defaulter.
The process listed out in the Master Circular has been carefully designed by a body of experts. The objective is to built up an adequate, comprehensive and reliable information system on borrowers so that such willful defaulters are barred from further institutional credit in terms of the penal measures listed out therein. The Master Circular provides at the end of Para 2.5 that -
"it would be imperative on the part of the banks and FIs to put in place a transparent mechanism for the entire process so that the penal provisions are not misused and the scope of such discretionary powers are kept to the barest minimum. It should also be ensured that a solitary or isolated instance is not made the basis for imposing the penal action".
The Master Circular sets out the broad guidelines and the banks/FIs are expected to follow them dealing with individual cases. The Master Circular takes every possible care to make Page 17 of 162 C/SCA/645/2014 CAV JUDGEMENT the process transparent and objective. Para 3 of the Master Circular prescribes the broad framework within which the banks/FIs are mandated to constitute and operate the Grievance Redressal Committees, leaving certain amount of flexibility for each banks/FIs to prescribe its detailed process, if found necessary, before declaring its borrower as a willful defaulter. Further, the mechanism provided under para 3 requires involvement of higher functionaries so that an objective view is taken. The process is also transparent through a detailed documentation supported by requisite evidence and clear mentioning of reasons for classification of a borrower as willful defaulter. It also gives ample opportunity to the borrower to represent itself against the proposed action, followed by a personal hearing, if required. In short, the principles of natural justice are followed in the said para 3 of the Master Circular.
The Reserve Bank of India has been continuously issuing guidelines on 'Willful Defaulters' in a phased manner commencing from 20th February 1999 to discourage the banks and financial institutions from granting any further financial aid to the willful defaulters, so as to act as a deterrent for the 'willful defaulters' and in order to safeguard banks from the risks of loan repayments, interest and liquidity. The guidelines contained in the impugned Master Circular have been issued at the instance of the Central Vigilance Commission and pursuant to the recommendations of the Working Groups. The instructions contained in the Master Circular are aimed at curbing the menace of non-performing assets in banks. The RBI, by issuing the said Circular, has taken few positive steps to protect the interests of banks and Page 18 of 162 C/SCA/645/2014 CAV JUDGEMENT financial institutions and to ensure that a list of willful defaulters is known and made available to other banks and financial institutions. The said purpose cannot be said to be arbitrary and unjustified. The RBI's circulars on 'willful defaulters' are in consonance with the law of the land and are meant for ensuring transparency and providing accountability so that the bank's funds are not misused by the unscrupulous elements.
Submissions on behalf of the Reserve Bank of India:
Mr.S.N.Soparkar, the learned senior advocate assisted by Mr.Amar Bhatt, the learned advocate appearing on behalf of the Reserve Bank of India, made the following submissions :
Mr.Soparkar, at the outset, submitted that so far as the Standard Chartered Bank is concerned, the same is a private bank. Although the same is a Scheduled Bank and figures in Schedule-II to the Reserve Bank of India Act, yet it cannot be termed as an institution or a company carrying on any statutory or public duty. Therefore, in such circumstances although the petitioners of Special Civil Application No.10120 of 2014 may be entitled to challenge the constitutional validity of the Master Circular issued by the Reserve Bank of India, yet no writ could be issued by this Court under Article 226 of the Constitution in so far as the proposed action pursuant to the issue of show-cause notice is concerned. In support of his submission, Mr.Soparkar has placed strong reliance on the decision of the Supreme Court in the case of the Federal Bank Ltd. v. Sagar Thomas & others, (2003)10 SC 737.
Page 19 of 162C/SCA/645/2014 CAV JUDGEMENT Mr.Soparkar further submitted that the contention raised on behalf of the petitioners as regards the absence of power on the part of the Reserve Bank of India to issue the impugned Master Circular is also devoid of any merit. According to Mr.Soparkar, the Reserve Bank of India being one of the watchdogs of finance and economy of the nation derives the power from the provisions of Sections 21 and 35-A of the Banking Regulation Act, 1949.
In response to our specific query as regards the control of the RBI upon the non-banking financial institutions, Mr.Soparkar drew our attention to Chapter-IIIB of the Reserve Bank of India Act, 1934, i.e. the provisions relating to Non- Banking Institutions receiving deposits as Financial Institutions. Mr.Soparkar invited our attention to Sections 45-H and 45-I of the Act, 1934. Section 45-I(c) defines "financial institution" which means any non-banking institution which carries on as its business or part of its business any of the activities enumerated in clauses (i) to (f).
Mr.Soparkar also invited our attention to Section 45-JA which relates to the power of the bank to determine any policy and issue directions.
Mr.Soparkar submitted that the Reserve Bank of India being a monetary regulator frames the banking policy. The Master Circular impugned in the two petitions is a part of the banking policy. Such banking policy is specified by the Reserve Bank of India from time to time in the interest of the banking system or monetary stability or sound economic growth. While Page 20 of 162 C/SCA/645/2014 CAV JUDGEMENT formulating any banking policy, the Reserve Bank of India has to give due regard to the interest of the depositors and other resources of the bank.
Mr.Soparkar submits that the court sitting in a writ jurisdiction under Article 226 of the Constitution may not examine the merits of the policy to find out, whether there could have been a better policy and interfere with such policy. Banking policy requires economic and fiscal expertise. According to Mr.Soparkar, the experts who are qualified to address the issues are the best people to take an appropriate decision in the interest of the entire economy of the nation.
Mr.Soparkar laid much stress on the fact that the NPA accounts are a big threat to the economy of the nation. The borrowers, at times, misuse the amount disbursed by the bank and thereby cause immense loss to a particular bank. On matters affecting policy and those requiring expertise, the court should be slow and circumspect to interfere unless such policy is contrary to the statutory provisions, arbitrary or otherwise unconstitutional.
Mr.Soparkar submitted that the issue of the Master Circular by the Reserve Bank of India relating to "willful default" and "willful defaulters" does not travel beyond the scope of the delegated legislation. Having regard to the nature of duties, functions and the role which the Reserve Bank of India plays as a premier financial institution of the country it was within the scope and powers of the RBI to issue such a circular in the interest of the banking system and the economy of the country.
Page 21 of 162C/SCA/645/2014 CAV JUDGEMENT Mr.Soparkar submitted that a mere possibility of an abuse of any provision of law, rule, regulation or a circular like the one in the present case, by itself, would not be sufficient to condemn the same as ultra vires the provisions of the Constitution of India or other banking enactments.
Mr.Soparkar submitted that the contention of bias and the bank being a judge in its own cause, is also devoid of any merit. Mr.Soparkar submits that the maxim "nemo judex in causa sua" constitute the basic elements of a fair hearing and is sought to be applied mechanically without any basis for such an apprehension.
According to Mr.Soparkar, the policy decision of the Reserve Bank of India to issue such a circular cannot be condemned on mere application of the doctrine referred to above. In a given case, if the action pursuant to such a policy decision is found to be tainted with bias, then in such circumstances, the Court can always correct such an arbitrary action. However, that by itself would not render the policy decision bad in law.
Mr.Soparkar in support of his submission has placed strong reliance on a decision of the Supreme Court in the case of Union of India v. Bipinkumar Jain, 2005(9) SCC 579, and in the case of Delhi Financial Corporation and another v. Rajiv Anand and others, (2004) 11 SCC 625.
Mr.Soparkar submitted that the contention as regards the unreasonable restriction imposed on a promoter/director of a Page 22 of 162 C/SCA/645/2014 CAV JUDGEMENT company being in direct infringement of the Article 19(1)(g) of the Constitution of India is absolutely devoid of any merit. According to Mr.Soparkar, although the right to do business is a fundamental right guaranteed under Article 19(1)(g) of the Constitution, yet this right is subject to a reasonable restriction under Article 19(6) of the Constitution. The reasonableness of the restriction has to be determined in an objective manner and has to be seen from the point of view of interest of the general public and not merely from the point of view of person upon whom the restrictions are imposed.
Mr.Soparkar, therefore, submits that there being no merit in both the writ-applications, the same deserves to be rejected.
ANALYSIS :
Having heard the learned counsel appearing for the parties and having gone through the materials on record, the only question that falls for our consideration in these petitions is, whether the petitioners are entitled to any of the reliefs as prayed for in their petitions.
It is a settled position of law that a statute can be invalidated or held unconstitutional --
(i) if it is ultra vires the Patent Act;
(ii) if it is contrary to the statutory provisions other than those contained in the Parent Act;
(iii) if law making power has been exercised in bad Page 23 of 162 C/SCA/645/2014 CAV JUDGEMENT faith;
(iv) if it is not reasonable and it goes against the legislative policy; and
(v) if it does not fulfill the object and purpose of the enabling Act.
It is also well-settled that while examining the constitutionality of a statute it must be assumed that the legislature understands and appreciates the needs of the people and the laws it enacts are directed to problems which are made manifest by experience and that the elected representatives assembled in a legislature enact laws which they consider to be reasonable for the purpose for which they are enacted. There is a presumption in favour of constitutionality and a law will not be declared unconstitutional unless the case is so clear as to be free from doubt. A statute should not be declared unconstitutional merely because in the opinion of the Court it violates one or more of the principles of liberty, of the spirit of the Constitution, unless such principles and that spirit are found in the terms of the Constitution.
FEW SALIENT FEATURES OF THE MASTER CIRCULAR :
Since the issue revolves around the legality and validity of the Master Circular issued by the Reserve Bank of India, we deem it necessary to look into the same in little details.
Page 24 of 162C/SCA/645/2014 CAV JUDGEMENT The need and necessity to issue the Circular has been explained in the Master Circular, which reads as under :
"Pursuant to the instructions of the Central Vigilance Commission for collection of information on willful defaults of Rs.25 lakhs and above by RBI and dissemination to the reporting banks and FIs, a scheme was framed by RBI with effect from 1st April 1999 under which the banks and notified All India Financial Institutions were required to submit to RBI the details of the willful defaulters. Willful default broadly covered the following:
a) Deliberate non-payment of the dues despite adequate cash flow and good networth;
b) Siphoning off of funds to the detriment of the defaulting unit;
c) Assets financed either not been purchased or been sold and proceeds have been misutilised;
d) Misrepresentation/falsification of records;
e) Disposal/removal of securities without bank's knowledge;
f) Fraudulent transactions by the borrower.
Accordingly, banks and FIs started reporting all cases of willful defaults, which occurred or were detected after 31st March 1999 on a quarterly basis. It covered all non- performing borrowal accounts with outstandings (funded facilities and such non-funded facilities which are converted into funded facilities) aggregating Rs.25 lakhs and above identified as willful default by a Committee of higher functionaries headed by the Executive Director and consisting of two GMs/DGMs. Banks/FIs were advised that they should examine all cases of willful defaults of Rs 1.00 crore and above for filing of suits and also consider criminal action wherever instances of cheating/fraud by the defaulting borrowers were detected. In case of consortium/multiple lending, banks and FIs were advised that they report willful defaults to Page 25 of 162 C/SCA/645/2014 CAV JUDGEMENT other participating/financing banks also. Cases of willful defaults at overseas branches were required be reported if such disclosure is permitted under the laws of the host country."
The term "willful default" as contained in clause (2.1) has been redefined in supersession of the earlier definition as under :
"2.1 Definition of wilful default The term "wilful default" has been redefined in supersession of the earlier definition as under:
A "wilful default" would be deemed to have occurred if any of the following events is noted :-
(a) The unit has defaulted in meeting its payment/ repayment obligations to the lender even when it has the capacity to honour the said obligations.
(b) The unit has defaulted in meeting its payment/ repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.
(c) The unit has defaulted in meeting its payment/ repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.
(d) The unit has defaulted in meeting its payment/ repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given by him or it for the purpose of securing a term loan without the knowledge of the bank/lender."
The terms "diversion of funds" and "siphoning of funds"
have also been defined in the impugned Master Circular. They Page 26 of 162 C/SCA/645/2014 CAV JUDGEMENT read as under :
"2.2 Diversion and siphoning of funds The terms "diversion of funds" and "siphoning of funds" should construe to mean the following:-
2.2.1 Diversion of funds, referred to at para 2.1(b) above, would be construed to include any one of the undernoted occurrences:
(a) utilisation of short-term working capital funds for long-term purposes not in conformity with the terms of sanction;
(b) deploying borrowed funds for purposes/activities or creation of assets other than those for which the loan was sanctioned;
(c) transferring funds to the subsidiaries/Group companies or other corporates by whatever modalities;
(d) routing of funds through any bank other than the lender bank or members of consortium without prior permission of the lender;
(e) investment in other companies by way of acquiring equities/ debt instruments without approval of lenders;
(f) shortfall in deployment of funds vis-a-vis the amounts disbursed/drawn and the difference not being accounted for.
2.2.2 Siphoning of funds, referred to at para 2.1(c) above, should be construed to occur if any funds borrowed from banks/FIs are utilised for purposes un-related to the operations of the borrower, to the detriment of the financial health of the entity or of the lender. The decision as to whether a particular instance amounts to siphoning of funds would have to be a judgement of the lenders based on objective facts and circumstances of the case.
The identification of the willful default should be made keeping in view the track record of the borrowers and Page 27 of 162 C/SCA/645/2014 CAV JUDGEMENT should not be decided on the basis of isolated transactions/incidents. The default to be categorised as willful must be intentional, deliberate and calculated."
The Circular explains the term "cut-off limits" for use of funds and stipulates the "penal measures" which are required to be taken to prevent the access to the capital markets by the willful defaulters. The Master Circular enumerates the "penal measures" which can be initiated by a bank against the willful defaulters. The said "penal measures" read as under :
"The following measures should be initiated by the banks and FIs against the willful defaulters identified as per the definition indicated at paragraph 2.1 above:
a) No additional facilities should be granted by any bank/FI to the listed willful defaulters. In addition, the entrepreneurs/promoters of companies where banks/FIs have identified siphoning/diversion of funds, misrepresentation, falsification of accounts and fraudulent transactions should be debarred from institutional finance from the scheduled commercial banks, Development Financial Institutions, Government owned NBFCs, investment institutions etc. for floating new ventures for a period of 5 years from the date the name of the willful defaulter is published in the list of willful defaulters by the RBI.
b) The legal process, wherever warranted, against the borrowers/ guarantors and foreclosure of recovery of dues should be initiated expeditiously. The lenders may initiate criminal proceedings against willful defaulters, wherever necessary.
c) Wherever possible, the banks and FIs should adopt a proactive approach for a change of management of the willfully defaulting borrower unit.
d) A covenant in the loan agreements, with the Page 28 of 162 C/SCA/645/2014 CAV JUDGEMENT companies in which the banks/notified FIs have significant stake, should be incorporated by the banks/FIs to the effect that the borrowing company should not induct a person who is a promoter or director on the Board of a company which has been identified as a willful defaulter as per the definition at paragraph 2.1 above and that in case, such a person is found to be on the Board of the borrower company, it would take expeditious and effective steps for removal of the person from its Board."
Immediately after mentioning the penal measures in the Master Circular, it has been stated that it would be imperative on the part of the banks and financial institutions to put in place a transparent mechanism for the entire process so that the penal measures are not misused and the scope of such discretionary orders are kept to the barest minimum.
To ensure that the identification of a willful defaulter is transparent and objective so as not to cause any inconvenience to the borrowers, the Master Circular, in clause (3), has set out Grievances Redressal Mechanism. The said clause reads as under :
"3. Grievances Redressal Mechanism Banks/FIs should take the following measures in identifying and reporting instances of willful default:
(i) With a view to imparting more objectivity in identifying cases of willful default, decisions to classify the borrower as willful defaulter should be entrusted to a Committee of higher functionaries headed by the Executive Director and consisting of two GMs/DGMs as decided by the Board of the concerned bank/FI.
(ii) The decision taken on classification of willful defaulters should be well documented and supported by requisite evidence. The decision should clearly spell out Page 29 of 162 C/SCA/645/2014 CAV JUDGEMENT the reasons for which the borrower has been declared as willful defaulter vis-à-vis RBI guidelines.
(iii) The borrower should thereafter be suitably advised about the proposal to classify him as willful defaulter along with the reasons therefor. The concerned borrower should be provided reasonable time (say 15 days) for making representation against such decision, if he so desires, to a Grievance Redressal Committee headed by the Chairman and Managing Director and consisting of two other senior officials.
(iv) Further, the above Grievance Redressal Committee should also give a hearing to the borrower if he represents that he has been wrongly classified as willful defaulter.
(v) A final declaration as 'willful defaulter' should be made after a view is taken by the Committee on the representation and the borrower should be suitably advised."
A bare perusal of the aforesaid clause indicates that the safeguards have been provided to protect the borrowers by ensuring that the decision to classify a borrower as a willful defaulter is entrusted to a committee, which is headed by the Executive Director of the concerned banks/financial institutions. Before a borrower is classified as a willful defaulter, he is required to be issued a notice along with documents and other evidence. The borrower is to be provided with a reasonable time to make representation against such proposed action. Thereafter, a decision has to be taken, whether a borrower is to be declared as a willful defaulter and the borrower is to be informed. Thus, there are number of stipulation and safeguards in the impugned Master Circular to protect the interest of the borrowers.
Page 30 of 162C/SCA/645/2014 CAV JUDGEMENT The object and purpose behind issuing the Master Circular appears to be plain and simple. The Master Circular has been issued to take care of the defects and problems experienced in the past. It is a policy decision which seems to have been taken after thorough examination of the problems faced by the banks and the financial institutions. The foundation of a scheme has been explained in the Master Circular, which reads as under :
"2. Guidelines issued on wilful defaulters Further, considering the concerns expressed over the persistence of willful default in the financial system in the 8th Report of the Parliament's Standing Committee on Finance on Financial Institutions, the Reserve Bank of India, in consultation with the Government of India, constituted in May 2001 a Working Group on Willful Defaulters (WGWD) under the Chairmanship of Shri S.S.Kohli, the then Chairman of the Indian Banks' Association, for examining some of the recommendations of the Committee. The Group submitted its report in November 2001. The recommendations of the WGWD were further examined by an In House Working Group constituted by the Reserve Bank. Accordingly, the Scheme was further revised by RBI on May 30, 2002.
The above scheme was in addition to the Scheme of Disclosure of Information on Defaulting Borrowers of banks and FIs introduced in April 1994, vide RBI Circular DBOD.No.BC/CIS/47/20.16.002/94 dated 23 April 1994."
POWER OF THE RESERVE BANK OF INDIA :
We now proceed to deal with the first contention raised on behalf of the petitioners as regards the power of the Page 31 of 162 C/SCA/645/2014 CAV JUDGEMENT Reserve Bank of India to issue the Master Circular. According to the learned advocates appearing on behalf of the petitioners the instructions contained in the Master Circular are beyond the legislative competence of the Reserve Bank of India. The Circular does not refer to any provision of law under which it has been issued.
We are not impressed by such submission canvassed on behalf of the petitioners. The statutory scheme of the Banking Regulation Act, 1949, and the Reserve Bank of India Act, 1934, was enacted by the Parliament for the regulation of banking business which, unlike any other business, is a special kind of business. Banking business is the business of acceptance of withdrawable deposits of money from the public for the purpose of lending of investment. While that describes the ordinary nature of banking, that activity in a developing society and economy has acquired an evolutionary nature, in that the essence of banking business in such an economy involves banks operating as basic financial intermediaries and playing a key role in the country's economy in general and mobilisation and distribution of the country's savings in particular. Banks are the largest repositories of the nation's savings. The conduct and affairs of the banks influence the various sectors of the economy. The economic development of the country depends largely on the safety and soundness of banking institutions. Banks are also the principal means for transmitting the credit policies of the country. Having regard to the delicate position of a bank in the country's economy, the failure of one bank can have a disastrous effect on the whole banking system, having the potential of leading to systematic Page 32 of 162 C/SCA/645/2014 CAV JUDGEMENT crisis with prejudicial effect on the economy as a whole. In view of all these considerations, the banking sector has been a highly regulated area all over the world. These principles governing the banking business have been embodied in the banking laws of India, viz. the Reserve Bank of India Act, 1934, and the Banking Regulation Act, 1949.
The significance of the Reserve Bank's position as the central bank of the country needs no emphasis. As the central bank and as the primary regulator of the banking business, the Reserve Bank has been vested with very wide powers and is also charged with certain duties as reflected in the preambles to and the provisions of the two legislations referred to above. The preamble to the Reserve Bank of India Act states that the bank is established, inter alia, generally to operate the currency and credit system of the country to its advantage. The powers under the Reserve Bank of India Act as also under the Banking Regulation Act have been conferred on the bank with a view to fulfill these objectives. The various powers under the Banking Regulation Act are related to public interest or the interest of banking policy. The expression "banking policy" has been defined in clause (ca) of section 5 of the Banking Regulation Act as under :
"(ca) 'banking policy' means any policy which is specified from time to time by the Reserve Bank in the interest of monetary stability or sound economic growth, having due regard to the interests of the depositors, the volume of deposits and other resources of the bank and the need for equitable allocation and the efficient use of these deposits and resources."Page 33 of 162
C/SCA/645/2014 CAV JUDGEMENT This definition and power conferred thereunder on the Reserve Bank to specify the policy clearly reflect the object that the banks truly become the instruments of transmitting economic policies including the credit policies of the country in a manner expected of them and serve the cause of public interest. It is the Reserve Bank's function to ensure, as best as it can, that the said object is achieved. Further, in view of the adverse effect that a bank's failure may have on the economy, the statutes also aim that the Reserve Bank's powers are exercised not only to effectively handle the crisis in the affairs of a banking company, but also to prevent a perceived failure or crisis in the affairs of the banking company. In respect of such matters, Parliament has vested full discretion in the Reserve Bank and the Central Government so that it should be open for these authorities to decide, depending upon the contingencies, the various alternatives or combination of them as provided by law to ensure protection of the interest of the depositors, the public interest and the interest of banking policy.
"21. Power of Reserve Bank to control advances by banking companies.--
(1) Where the Reserve Bank is satisfied that it is necessary or expedient in the public interest or in the interests of depositors or banking policy so to do, it may determine the policy in relation to advances to be followed by banking companies generally or by any banking company in particular, and when the policy has been so determined, all banking companies or the banking company concerned, as the case may be, shall be bound to follow the policy as so determined.
(2) Without prejudice to the generality of the power vested in the Reserve Bank under sub-section (1) the Page 34 of 162 C/SCA/645/2014 CAV JUDGEMENT Reserve Bank may give directions to banking companies, either generally or to any banking company or group of banking companies in particular, as to --
(a) the purposes for which advances may or may not be made,
(b) the margins to be maintained in respect of secured advances,
(c) the maximum amount of advances or other financial accommodation which, having regard to the paid-up capital, reserves and deposits of a banking company and other relevant considerations, may be made by that banking company to any one company, firm, association of persons or individual,
(d) the maximum amount up to which, having regard to the considerations referred to in clause
(c), guarantees may be given by a banking company on behalf of any one company, firm, association of persons or individual, and
(e) the rate of interest and other terms and conditions on which advances or other financial accommodation may be made or guarantees may be given.
(3) Every banking company shall be bound to comply with any directions given to it under this section."
"35A : Power of the Reserve Bank to give directions
(1) Where the Reserve Bank is satisfied that-
(a) in the [public interest]; or [(aa) in the interest of banking policy; or]
(b) to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking Company;
or
Page 35 of 162
C/SCA/645/2014 CAV JUDGEMENT
(c) to secure the proper management of any banking company generally;
it is necessary to issue directions to banking companies generally or to any banking company in particular, it may from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions.
(2) The Reserve Bank may on representation made to it or on its own motion, modify or cancel any direction issued under sub-section (1), and in so modifying or canceling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect.]"
It is beyond dispute that banks, as financial instrumentalities are required to strive to fulfill, not only the object of achieving commercial efficiency, but also to serve the object of public interest. In fact, without serving public interest, no bank can legitimately claim any right to exist. It is inconceivable that a bank, as an instrumentality of, and also being capable of, wielding powerful weapons for transformation of the socioeconomic structure of the society, can act without taking into account the public interest and can act for furtherance of private interests of a limited group of persons.
It also needs to be appreciated that with the liberalisation in the economy, the banking sector is widely expanding necessitating basic changes in the profiles of the banks in relation to the pattern of their shareholding, capital structure, management composition, as also operational systems, and Page 36 of 162 C/SCA/645/2014 CAV JUDGEMENT even the very manner of conduct of banking business. The past failures of some private sector banks and huge losses of public sector banks have only underlined the need for such changes. Taking note of this, and the changing economic scenario as also the emerging competitive environment, it has become imperative for the banks to become more professionally managed, widely capital based, to have more diversified activities, to be more technically advanced. This, in turn, has also resulted, in a policy by the Reserve Bank for consolidation of the banking system and other measures in the interest of the banking system of the country as a whole. Further, the past failures of some banks raising concern for the banking system have constrained the Reserve Bank to take many steps to strengthen the financial soundness of the banking system. Increasing the capital base of the banks is one such measure. Similarly, various other policy measures have been initiated to ensure better quality of assets, induction of professional management, diversified credit portfolio, improved accounting systems, transparency in balance-sheets, etc.
The question for our consideration is, whether it will be open for this court to review the decisions which have been taken by a specialised body like the Reserve Bank of India and arrive at different conclusions. The scope of jurisdiction in such matters has been settled by various judgments of the Supreme Court and the same may be referred to at this stage.
In Joseph Kuruvilla Vellukunnel v. Reserve Bank of India, AIR 1962 SC 1371, the position of the Reserve Bank of India is Page 37 of 162 C/SCA/645/2014 CAV JUDGEMENT clearly stated in the following paragraphs which are referred to at pp.1379-80 and 1382 as under :
"But the most important function of the Reserve Bank is to regulate the banking system generally. The Reserve Bank has been described as a bankers' bank. Under the Reserve Bank of India Act, the scheduled banks maintain certain balances and the Reserve Bank can lend assistance to those banks 'as a lender of the last resort'. The Reserve Bank has also been given certain advisory and regulatory functions. By its position as a central bank, it acts as an agency for collecting financial information and statistics. It advises Government and other banks on financial and banking matters, and for this purpose, it keeps itself informed of the activities and monetary position of scheduled and other banks and inspects the books and accounts of scheduled banks and advises Government after inspection whether a particular bank should be included in the Second Schedule or not. Every scheduled bank is required to send to the Reserve Bank and to the Central Government a weekly return of its position in a form, which is prescribed. Sometimes, however, the Reserve Bank allows a particular bank to send its returns once a month instead of every week. From these returns, the Reserve Bank prepares and publishes consolidated statements showing the monetary position in the country. The inclusion of a bank in the Second Schedule is the function of the Reserve Bank, and under sections 42(6)(a)(iii) and (b)(ii) it satisfies itself, inter alia, that the affairs of the particular bank are not being conducted in a manner detrimental to the interests of its depositors. The Reserve Bank has further the power to prohibit any scheduled bank from receiving, after a week, any fresh deposits.
The above analysis of some of the provisions of the Reserve Bank of India Act show that the Reserve Bank of India has been created as a central bank with powers of supervision, advice and inspection, over banks, particularly those desiring that they be included in the Second Schedule or those scheduled already. The Reserve Bank thus safeguards the economy and the financial stability of the country. No doubt, the board is Page 38 of 162 C/SCA/645/2014 CAV JUDGEMENT composed of nominated members; but from the nature of things, it could not be otherwise. Neither election nor competitive examinations can effectively take the place of nominations, if the board is to be composed of men of proven worth and standing, and there is no other method which can even be contemplated. No doubt, the members of the board are subject to removal, but neither integrity nor efficiency is secured only by such guarantee, and we have no reason to think that the Reserve Bank acted in this case, or acts in other cases under pressure or from oblique motives. As was pointed out in another connection by this court in All India Bank Employees Association v. National Industrial Tribunal, AIR 1962 SC 171 at p.183 :
"If it was not the Reserve Bank of India, the only other authority that could be entrusted with the function would be the Finance Ministry of the Government of India and that department would necessarily be guided by the Reserve Bank having regard to the intimate knowledge which the Reserve Bank has of the banking structure of the country as a whole and of the affairs of each bank in particular."
..... ...... ..... .....
Nor do the powers of the Reserve Bank end there. The Reserve bank not only has powers over banking companies while they are functioning, but it has also powers when the banking companies wish or are forced to cease to function. If a banking company wants to suspend its business and applies to the High Court for a moratorium, the application is not maintainable, unless it is accompanied by a report of the Reserve Bank indicating that in the opinion of the Reserve Bank the banking company will be able to pay its debts. When the High Court grants the reliefs without such report, it has to call for a report from the Reserve Bank. The High Court is also required to have regard to the interests of the depositors, and even during the period of moratorium granted by the High Court, the Reserve Bank can apply for the winding up of the banking company. Sections 39 and 41A give special powers to the Reserve Bank in winding up proceedings. Even in voluntary winding up of Page 39 of 162 C/SCA/645/2014 CAV JUDGEMENT a banking company, the Reserve Bank has to certify that the banking company is able to pay in full all its debts to its creditors, as they accrue. In amalgamation of banking companies, the scheme has to be approved by the Reserve Bank. Similarly, in compromises or arrangements between the banking company and its creditors, the Reserve Bank has to be satisfied. In all these matters, the satisfaction, inter alia, must be as to the interests of the depositors. In reconstruction of banking company after an application by the Reserve Bank for an order of moratorium, the Reserve Bank has to satisfy itself and prepare a scheme, which inter alia must be in the interests of the depositors."
The feasibility and practicability of granting hearing, recording of reasons and communicating the same to the parties has been explained at pp.1383 and 1387-88 as under :
"That leaves over the second and third arguments, which proceed upon the same materials. In this connection, the main grounds of attack have already been set out in this judgment. Before we deal with the central point, we shall deal with certain others which proceed said so to speak, from the side lines. The objection that the Reserve Bank gives no hearing, records no reasons in writing and does not communicate them is met at least in this case by the admitted facts. The numerous inspection reports and directions issued by the Reserve Bank over a period of nearly nine years, together with the application filed in this case, prove amply that there was enough hearing of and enough communication of the grounds of action to the Palai Bank. The Bank had also sufficient time and opportunity to establish its own point of view before the Reserve Bank. It was impossible that the Reserve Bank, with the run on the bank, would sit down to decide after hearing whether to take action or not, while withdrawals were being at the rate of Rs. 7 lakhs per day. The emergency of the situations which may arise, is itself the justification for the procedure open under the Act and taken in this case. In our opinion, these grounds cannot be entertained. It is difficult to imagine that the Reserve Bank would act differently in another case.Page 40 of 162
C/SCA/645/2014 CAV JUDGEMENT ..... ..... ..... .....
The learned Attorney General, on the other side, drew our attention to Virendra v. State of Punjab, , where it has been pointed out that in judging the reasonableness of any particular law 'the surrounding circumstances in which the impugned law came to be enacted, the underlying purpose of the enactment and the extent and urgency of the evil sought to be remedied' must also be considered. That case concerned the freedom of speech and its alleged curtailment by the Punjab Special Powers (Press) Act, 1956. In judging the reasonableness of the law from the angle of the exclusion of courts, this court observed :
"Legislature had to ask itself the question : who will be the appropriate authority to determine at any given point of time as to whether the prevailing circumstances require some restriction to be placed on the right to freedom of speech and expression and the right to carry on any occupation, trade or business and to what extent ? The answer was obvious, namely, that as the State Government was charged with the preservation of law and order in the State, as it alone was in possession of all material facts it would be the best authority to investigate the circumstances and assess the urgency of the situation that might arise and to make up its mind whether any and, if so, what anticipatory action must be taken for the prevention of the threatened or anticipated breach of the peace. The court is wholly unsuited to gauge the seriousness of the situation, for it cannot be in possession of materials which are available only to the executive Government. Therefore, the determination of the time when and the extent to which restrictions should be imposed on the Press must of necessity be left to the judgment and discretion of the State Government and that is exactly what the Legislature did by passing the statute... Quick decision and swift and effective action must be of the essence of these powers and the exercise of it must, therefore, be left to the subjective satisfaction of the Government... To Page 41 of 162 C/SCA/645/2014 CAV JUDGEMENT make the exercise of these powers justiciable and subject to the judicial scrutiny will defeat the very purpose of the enactment."
These observations lay down clearly that there may be occasions and situations in which the Legislature may, with reason, think that the determination of an issue may be left to an expert executive like the Reserve Bank rather than the courts without incurring the penalty of having the law declared void.
The scope of powers of the Reserve Bank of India is further amplified in the judgment reported as Peerless General Finance and Investment Co. Ltd. v. Reserve Bank of India, AIR 1992 SC 1033. Paragraphs 30, 31 and 52 may be reproduced as under :
"30. Before examining the scope and effect of the impugned paragraphs (6) and (12) of the Directions of 1987, it is also important to note that the Reserve Bank of India which is bankers' bank is a creature of statute. It has a large contingent of expert advisers relating to matters affecting the economy of the entire country and nobody can doubt the bona fides of the Reserve Bank in issuing the impugned directions of 1987. The Reserve Bank plays an important role in the economy and financial affairs of India and one of its important functions is to regulate the banking system in the country. It is the duty of the Reserve Bank to safeguard the economy and financial stability of the country. While examining the power conferred by section 58A of the Companies Act, 1956, on the Central Government to prescribe the limits up to which, the manner in which and the conditions subject to which deposits may be invited or accepted by non-banking companies, this court in Delhi Cloth and General Mills Co. Ltd. v. Union of India, AIR 1983 SC 937, observed as under :Page 42 of 162
C/SCA/645/2014 CAV JUDGEMENT "Mischief was known and the regulatory measure was introduced to remedy the mischief. The conditions which can be prescribed to effectuate this purpose must, a fortiori, to be valid, fairly and reasonably, relate to checkmate the abuse of juggling with the depositors/investors hard earned money by the corporate sector and to confer upon them a measure of protection namely availability of liquid assets to meet the obligation of repayment of deposit which is implicit in acceptance of deposit. Can it be said that the conditions prescribed by the Deposit Rules are so irrelevant or have no reasonable nexus to the objects sought to be achieved as to be arbitrary ? The answer is emphatically in the negative. Even at the cost of repetition, it can be stated with confidence that the rules which prescribed conditions subject to which deposits can be invited and accepted do operate to extend a measure of protection against the notorious abuses of economic power by the corporate sector, to the detriment of depositors/investors, a segment of the society which can be appropriately described as weaker in relation to the mighty corporation. One need not go so far with Ralph Nader in America incorporated to establish that political institutions may fail to arrest or control this ever-widening power of corporations. And can one wish away the degree of sickness in private sector companies ? To the extent companies develop sickness, in direct proportion the controllers of such companies become healthy. In a welfare State, it is the constitutional obligation of the State to protect socially and economically weaker segments of the society against the exploitation by corporations. We, therefore, see no merit in the submission, that the conditions prescribed bear no relevance to the object or the purpose for which the power was conferred under section 58A on the Central Government."
31. The function of the court is to see that lawful authority is not abused but not to appropriate to itself the task entrusted to that authority. It is well settled that a public body invested with statutory powers must take Page 43 of 162 C/SCA/645/2014 CAV JUDGEMENT care not to exceed or abuse its power. It must keep within the limits of the authority committed to it. It must act in good faith and it must act reasonably. Courts are not to interfere with economic policy which is the function of experts. It is not the function of the courts to sit in judgment over matters of economic policy and it must necessarily be left to the expert bodies. In such matters even experts can seriously and doubtlessly differ. Courts cannot be expected to decide them without even the aid of experts.
52. This court in Joseph Kuruvilla Vellukunnel v. Reserve Bank of India, AIR 1962 SC 1371 held that the RBI is 'a bankers' bank and 'lender of the last resort'. Its objective is to ensure monetary stability in India and to operate and regulate the credit system of the country. It has, therefore, to perform a delicate balance between the need to preserve and maintain the credit structure of the country by strengthening the rule as well as apparent credit structure of the banks operating in the country and the interest of depositors. In an underdeveloped country like ours, where majority of the population are illiterate and poor and are not conversant with banking operations and in underdeveloped money and capital market with mixed economy, the Constitution charges the State to prevent exploitation and so the RBI would play both promotional and regulatory roles. Thus the RBI occupies a place of 'pre-eminence' to ensure monetary discipline and to regulate the economy or the credit system of the country as an expert body. It also advises the Government in public finance and monetary regulations. The banks or non-banking institutions shall have to regulate their operations in accordance not only with the provisions of the Act but also the rules and directions or instructions issued by the RBI in exercise of the power thereunder. Chapter 3-B expressly deals with regulations of deposit and finance received by the RNBCs. The directions, therefore, are statutory regulations."
Thus, from the above, the law is well-settled that the Reserve Bank of India, which is described as the supreme bank of the country, is empowered to regulate the banking system and certain regulatory functions have been assigned to it by Page 44 of 162 C/SCA/645/2014 CAV JUDGEMENT the provisions of the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949. It is in exercise of such powers that the Reserve Bank of India has thought fit to issue the impugned Master Circular.
We are also not impressed by the submission canvassed on behalf of the petitioners that the source of power has not been indicated in the Master Circular and there is no reference of any public interest in the impugned Circular. In short, the submission on behalf of the petitioners is that, if the Master Circular has been issued by the Reserve Bank of India in public interest, then it should have been stated in so many words along with the statutory provisions under which the Reserve Bank of India derives the power.
It is well-settled that if source of power is traceable, exercise of such power cannot be set-aside merely because the same has not been disclosed. In this context, we may profitably refer to a decision of the Supreme Court in the case of Union of India v. Azadi Bachao Andolan, (2004)10 SCC 1. The issue before the Supreme Court was, whether the impugned circular issued under the Income Tax Act was ultra vires Section 119 of the Act. The Supreme Court in para 46 observed thus, which, in our opinion, answers the contention canvassed on behalf of the petitioners :
"46. While commenting adversely upon the validity of the impugned circular, the High Court says "that the circular itself does not show that the same has been issued under Section 119 of the Income-tax Act. Only in a case where the circular is issued under Section 119 of the Income-tax Act, the same would be legally binding on the revenue.Page 45 of 162
C/SCA/645/2014 CAV JUDGEMENT The circular does not deal with the power of the ITO to consider the question as to whether although apparently a company is incorporated in Mauritius but whether the company is also a resident of India and/or not a resident of Mauritius at all."
It is trite law that as long as an authority has power, which is traceable to a source, the mere fact that source of power is not indicated in an instrument does not render the instrument invalid.
Although the learned advocates appearing on behalf of the petitioners have placed strong reliance on a decision of the Karnataka High Court in the case of E.Sathyanarayanan (supra), yet with due deference we are unable to subscribe to the views expressed by His Lordship, more particularly, when there are Supreme Court decisions on the issue.
DELEGATED LEGISLATION :
The above takes us to deal with the submission as regards the scope and power of the Reserve Bank of India to issue the Master Circular in exercise of powers under the delegated legislation.
It is true that a delegated legislation can be challenged before the Courts on the ground of being ultra vires the parent Act. The Courts can adjudge the legality and validity of delegated legislation by applying the doctrine of ultra vires. The doctrine of ultra vires has two aspects : substantive and Page 46 of 162 C/SCA/645/2014 CAV JUDGEMENT procedural. When delegated legislation goes beyond the scope of the authority conferred by, or it is in conflict with, the parent statute it is invalid and this is known as substantive ultra vires. When the regulation-making authority deviates from the procedure, if any, prescribed by the parent statute for making regulations, it is known as procedural ultra vires. In these writ petitions, what is urged is the substantive ultra vires only and not procedural ultra vires. Whenever any person or body of persons, exercising statutory authority acts beyond the powers conferred upon him or them by statute, such acts become ultra vires and, accordingly, void. In other words, substantive ultra vires means the delegated legislation goes beyond the scope of the authority conferred on it by the parent statute. It is a fundamental principle of law that a public authority cannot act outside the powers i.e., ultra vires, and it has been rightly described as the central principle and foundation of large part of administrative law by Prof. Wade in his Treatise on Administrative Law. The act which is for any reason in excess of power is ultra vires.
In Indian Express Newspapers v. Union of India, AIR 1986 SC 515, E.S.Venkataramaiah, J. (as he then was) stated (para
73) :
"A piece of subordinate legislation does not carry the same degree of immunity which is enjoyed by a statute passed by a competent Legislature. Subordinate legislation may be questioned on any of the grounds on which plenary legislation is questioned. In addition it may also be questioned on the ground that it does not conform to the statute under which it is made. It may further be questioned on the ground that it is contrary to some other statute. That is because subordinate legislation must yield to plenary legislation. It may also Page 47 of 162 C/SCA/645/2014 CAV JUDGEMENT be questioned on the ground that it is unreasonable, unreasonable not in the sense of not being reasonable, but in the sense that it is manifestly arbitrary".
In the same case, the Court also opined that the power delegated by the statute to the delegate is limited by its terms and subordinate to its objects. The delegate must act in good faith, reasonably, intra vires the power granted and on relevant consideration of material facts. It has also stated that all his decisions must be in harmony with the Constitution and other laws of the land; if they are manifestly unjust or oppressive or outrageous or directed to an unauthorised end or do not tend in some degree to the accomplishment of the objects of delegation, Court might well say, Legislature never intended to give authority to make such regulations, they are unreasonable and ultra vires. Thus, delegated legislation or subordinate legislation can be held valid only if it conforms exactly to the power granted. Regulations, whether made under the Constitution or a statute, must be intra vires the parent law under which power has been delegated. If the regulation-making power is conferred and the regulations made are in excess of that power the regulation would be void even if the Act provided that they shall have effect as if enacted in the Act. The validity of the regulation is always open to challenge on the ground that it is unauthorised. The validity of the delegated legislation is a question of vires, that is, whether or not the power has been exceeded or otherwise wrongfully exercised or is inconsistent with the parent Act.
The doctrine of ultra vires quite often is one of the recognised principles/grounds to invalidate a delegated Page 48 of 162 C/SCA/645/2014 CAV JUDGEMENT legislation. The basic principle of this doctrine is that an authority being the creature of the law it has only such powers as are granted to it by the law.
Declaring a rule in the Karnataka Motor Vehicle Rules, 1963 ultra vires the Motor Vehicles Act, 1939 as the rule was inconsistent with a section in the Act, the Supreme Court, in State of Karnataka v. H.Ganesh Kamath, AIR 1983 SC 550, held that the rule-making power cannot include within its scope the power to make a rule contrary to the provisions of the Act conferring the rule-making power and that conferment of rule- making power by an Act does not enable the rule-making authority to make a rule which travels beyond the scope of the enabling Act or which is inconsistent therewith or repugnant thereto. The Apex Court in State of U.P. v. Renusagar Power Co., reported in AIR 1988 SC 1737, held (Para 76) :
"If the exercise of power is in the nature of subordinate legislation, the exercise must conform to the provisions of the statute. All the conditions of the statute must be fulfilled. Thus, delegated legislation repugnant to, or inconsistent with or in contravention of, or in excess of, or overriding the provisions of, the parent Act is ultra vires."
Thus, it is clear that if power is conferred to legislate only with respect to certain topics or for certain purposes or in certain circumstances, the limits of the power must not be crossed. For this purpose, the phraseology of the delegating provision becomes relevant. In applying the doctrine, the Court has a three-fold task : first, to determine the meaning of the words used in the Act itself to describe the delegated legislation which the delegate is authorised to make; secondly, Page 49 of 162 C/SCA/645/2014 CAV JUDGEMENT to determine the meaning of the subordinate legislation itself, and, finally, to decide whether the subordinate legislation complies with that description.
It also needs to be emphasised before proceeding further to deal with the contention of the learned counsel for the petitioner, that in evaluating the vires of the delegated legislation, the Courts start with the presumption of constitutionality, competence and reasonableness of the delegated legislation impugned before it just as the Courts do in respect of primary legislation by the legislature. As a general proposition, delegated legislation is regarded as validly made, and part of the law of the land, until a Court decides otherwise.
In Hoffman-La Roche v. Secretary of State for Trade and Industry, (1975) AC 295, Lord Diplock speaking for the House of Lords referred to this aspect and observed :
"......the presumption that subordinate legislation is intra vires prevails in the absence of rebuttal, and that it cannot be rebutted except by a party to legal proceedings in a Court of competent jurisdiction who has locus standi to challenge the validity of the subordinate legislation in question."
Thus, the Court while reviewing the validity of a delegated legislation, should presume such delegated legislation prima facie to be intra vires and it is for the person aggrieved to prove affirmatively that the presumption in favour of constitutionality, competence, fairness and reasonableness is unsustainable as held by the Apex Court in State of U. P. v. Baburam, AIR 1961 SC 751. The onus of establishing invalidity is on the challenger.
Page 50 of 162C/SCA/645/2014 CAV JUDGEMENT The question whether a particular delegated legislation is in excess of the power of the supporting legislation conferred on the delegate, has to be determined with regard not only to specific provisions contained in the relevant statute conferring the power to make rule or regulation, but also the object and purpose of the Act as can be gathered from the various provisions of the enactment. It would be wholly wrong for the Court to substitute its own opinion as to what principle or policy would best serve the objects and purposes of the Act, nor is it open to the Court to sit in judgment of the wisdom, the effectiveness or otherwise of the policy, so as to declare a regulation to be ultra vires merely on the ground that, in the view of the Court, the impugned provision will not help to carry through the object and purposes of the Act. The Supreme Court reiterated the legal position, well established by a long series of decisions, in Maharashtra State Board of Secondary and Higher Secondary Education and another v. Paritosh Bhupeshkumar Sheth and others, AIR 1984 SC 1543, at para 14 as under :
"So long as the body entrusted with the task of framing the rules or regulations acts within the scope of the authority conferred on it, in the sense that the rules or regulations made by it have a rational nexus with the object and purpose of the statute, the court should not concern itself with the wisdom or efficaciousness of such rules or regulations. It is exclusively within the province of the legislature and its delegate to determine, as a matter of policy, how the provisions of the statute can best be implemented and what measures, substantive as well as procedural would have to be incorporated in the rules or regulations for the efficacious achievement of the objects and purposes of the Act. It is not for the Court to examine the merits or demerits of such a policy because its scrutiny has to be limited to the question as Page 51 of 162 C/SCA/645/2014 CAV JUDGEMENT to whether the impugned regulations fall within the scope of the regulation-making power conferred on the delegate by the statute."
Applying the aforenoted test, we are unable to hold that the impugned circular amounts to impermissible delegation of legislative power. An overall responsibility to find out the well being of a Banking Company, in improving monetary stability and economic growth as well as keeping in view the interests of depositors, the Reserve Bank of India has to formulate its policy vis-a-vis Banking Companies. 'Banking' as defined in Section 5(b) only gives a grammatical meaning of the transactions of a bank and nothing more. If any management or supervision is to be done over the banking activities of a bank, it will have to be governed by banking policy. The 'banking policy' and 'banking' are not independent but co- ordinating subjects and both are covered within the supervisory powers of the Reserve Bank of India within the meaning of Section 35A of the Banking Regulation Act. Even otherwise, the directions issued by the Reserve Bank of India are in the larger interest of the public and it being a body of experts in banking, the directions given by it should not be lightly brushed aside.
STATUTORY STATUS OF THE CIRCULAR :
The above takes us now to deal with the submission as regards the statutory status of the Master Circular.
It has been strenuously contended before us by the Page 52 of 162 C/SCA/645/2014 CAV JUDGEMENT learned advocates appearing on behalf of the petitioners that the impugned Master Circular has no force in law and cannot be termed as a statutory circular. In short, the sum and substance of the submission canvassed on behalf of the petitioners is that, if the Reserve Bank of India wanted to issue a Master Circular laying down a policy for declaring the borrowers as willful defaulters and the consequences of the same, then the same could have been done only by enacting a law within the meaning of Article 13 of the Constitution of India, otherwise a circular will have no force of law.
We are not impressed even by such submission as we have already indicated in our earlier part of the judgment the source of power and the exercise of the same by the Reserve Bank of India in the interest of banking and banking policy.
It is clear that the Master Circular has been issued with a particular object. Whether a circular issued by a statutory authority would be binding or not, or whether the same has a statutory force or not, would depend upon the nature of the statute. For the said purpose, the intention of the Legislature must be considered.
The Supreme Court, in the case of Sudhir Shantilal Mehta v. C.B.I., AIR 2009 SCW 5709, had the occasion to consider an identical issue. In that case, the circular was issued by the Reserve Bank of India exercising control over the banking companies. The Supreme Court made the following observations, which are worth noting :
Page 53 of 162C/SCA/645/2014 CAV JUDGEMENT "...Having regard to the fact that the Reserve Bank of India exercises control over the Banking Companies, we are of the opinion that the said Circular letter was binding on the Banking Companies. The officials of UCO Bank were, therefore, bound by the said circular letter.
The Madhya Pradesh High Court in The State of Madhya Pradesh v. Ramcharan [AIR 1977 MP 68] held:
"6. Although the Constitution does not contain any generic definition of law, it defines "law" for purposes of Article 13 to include "any Ordinance, order, bye-law, rule, regulation, notification, custom or usage having in the territory of India the force of law". Article 366(10) of the Constitution also defines the expression "existing law" to mean "any law, Ordinance, Order, bye-law, rule or regulation passed or made before the commencement of this Constitution by any legislature authority or person having power to make such law, Ordinance, order, bye- law, rule or regulation". Another definition which is relevant here is the definition of the expression "Indian law" in the General Clauses Act, 1897. Section 3(29) of this Act defines "Indian Law" to mean "any Act, Ordinance, regulation, rule, order or bye-law, which before the commencement of the Constitution had the force of law in any Province of India or part thereof and hereafter has the force of law in any Part A State or Part C State or part thereof, but does not include any Act of Parliament of the United Kingdom or any Order in Council, rule or other instrument made under such Act". These definitions go to confirm that under our legal order "law" does not include only legislative enactments but it also includes rules, orders, notifications etc. made or issued by the Government or any subordinate authority in the exercise of delegated legislative power.
... 7. The question relating to a post-constitution order or notification in the context whether it amounts to law was considered by the Supreme Page 54 of 162 C/SCA/645/2014 CAV JUDGEMENT Court in Jayantilal Amratlal v F. N. Rana, AIR 1964 SC 648. ...The Court further observed as follows:
"This is not to say that every order issued by an executive authority has the force of law. If the order is purely administrative, or is not issued in exercise of any statutory authority it may not have the force of law. But where a general order is issued even by an executive authority which confers power exercisable under a statute, and which thereby in substance modifies or adds to the statute, such conferment of powers must be regarded as having the force of law." ..."
The issue as regards the statutory force of a circular is no longer res integra. The Supreme Court, in the case of B.O.I.
Finance Ltd. v. The Custodian and others, AIR 1997 SC 1952, and Central Bank of India v. Ravindra and others, AIR 2001 SC 3095, has examined such issue at length. While examining the Securities Contracts (Regulation) Act and the Banking Regulation Act in B.O.I. Finance Ltd.(supra), the Supreme Court specifically dealt with the provisions of Section 36(1)(a) which empowers the RBI to auction or prohibit the banking companies generally or any banking company in particular against entering into any particular transaction and generally to give advice to any banking companies, and held that a circular issued by the RBI which stated that the banks were advised to follow the Guidelines given thereunder, the word 'advised' cannot be read in isolation and the said document was meant to be binding on the banking companies.
In the case of Central Bank of India (supra), the Supreme Court observed that the RBI is a prime banking institution of Page 55 of 162 C/SCA/645/2014 CAV JUDGEMENT the country entrusted with a supervisory role over banking and conferred with the authority of issuing binding directions, having statutory force, in the interest of public in general and preventing banking affairs from deterioration and prejudice as also to secure the proper management of any banking company generally. It was further observed as below :
"...RBI has been issuing directions/circulars from time to time which, inter alia, deal with rate of interest which can be charged and the periods at the end of which rests can be struck down, interest calculated thereon and charged and capitalised. It should continue to issue such directives. Its circulars shall bind those who fall within the net of such directives. For such transaction which are not squarely governed by such circulars, the RBI directives may be treated as standards for the purpose of deciding whether the interest charged is excessive, usurious or opposed to public policy."
'NEMO JUDEX IN CAUSA SUA' :
The above takes us to deal with the contention as regards the validity of the Master Circular on the basis of the application of the maxim 'nemo judex in causa sua'. The substance of the argument of the learned advocates appearing on behalf of the petitioners is that the bank itself will be a judge in its own cause, and in such circumstances, there will always be an element of personal bias which ultimately would affect the interest of the borrowers.
Natural justice as is well-known is founded on two basic principles:
Page 56 of 162C/SCA/645/2014 CAV JUDGEMENT (a) Audi alteram partem. (b) Nemo judex in causa sua.
The duty to act fairly is the theme of the principles of natural justice. However, the extent of the duty to act fairly will normally be very limited where the authority exercises a function which does not culminate in a binding decision. The rule generally applies, at least with full force, only to the conduct leading directly to a final act of the decision, and not to the making of a preliminary decision or to an investigation designed to obtain information for the purpose of a report or a recommendation on which a subsequent decision may be founded. (see Halsbury's Laws of England, Vol.1(i), 4th Edition, paras 85 and 94.) The standard of fairness may be different where the proceedings are in inquisitorial form.
Bias can be classified under three different heads:
(a) a legal interests which mean that the Judge is "in such a position that a bias must be assumed."
(b) pecuniary interest.
(c) personal bias.
Law in this regard has expanded to a great extent. In J.F.Garner's Administrative Law, it was stated:
Page 57 of 162C/SCA/645/2014 CAV JUDGEMENT "The natural justice 'bias' rule looks to external appearances rather than to proof of actual improper exercise of power. If the reasonable observer would have the requisite degree of suspicion of bias in the decision- maker then that decision can be challenged. It is a matter of the courts ensuring that 'justice is seen to be done'. Since successful challenge is based on appearances, it is natural that the types of matter to which the rule applies is somewhat confined. As we shall see it clearly applies to judicial and disciplinary functions but not generally more widely to administrative decision- making and actions."
In Manak Lal v. Dr.Prem Chand, AIR 1957 SC 425, the Supreme Court observed (at p. 429) :--
"But where pecuniary interest is not attributed but instead a bias is suggested, it often becomes necessary to consider whether there is a reasonable ground for assuming the possibility of bias and whether it is likely to produce in the minds of the litigant or the public at large a reasonable doubt about the fairness of the administration of justice. It would always by a question of fact to be decided in each case. 'The principle', says Halsbury, 'nemo debet esse judex in causa propria sua precludes a justice, who is interested in the subject- matter of a dispute, from acting as a justice therein'. In our opinion, there is and can be no doubt about the validity of this principle and we are prepared to assume that this principle applies not only to the justice as mentioned by Halsbury but to all tribunals and bodies which are given jurisdiction to determine judicially the rights of parties".
In Andhra Pradesh State Road Transport Corporation, Hyderabad v. Sri Satyanarayana Transports (P) Ltd., Guntur, AIR 1965 SC 1303, the Supreme Court held that the elementary rule of natural justice that person trying a cause, Page 58 of 162 C/SCA/645/2014 CAV JUDGEMENT though in a quasi-judicial proceeding, should not suffer from a personal bias. In this case the proceedings before the bank of inquiry is not a quasi-judicial proceedings. The Apex Court stated (at p. 1307) :
"We ought, however, to add that in the light of the general considerations which we have set out, it is of utmost importance that in appreciating evidence, the Court ought to adopt a very cautious, circumspect, and careful approach. If the evidence led by the parties in such a case is tested by cross-examination, it would be easier to determine where truth lies. But in the absence of cross-examination, appreciating the effect of competing affidavits is hot an easy matter. In such a case, the Court must always enquire on which side the probabilities lie and must scrutinise the affidavits very critically to determine which of them deserves to be believed. Naturally, in dealing with such a question of fact in appeal, we are normally inclined to attach importance to the findings of fact recorded by the High Court itself."
Recently, in the case of Union of India v. Vipan Kumar Jain, (2005)9 SCC 579, the Supreme Court held that an officer who had carried out a search under Section 132 of the Income Tax Act, 1961, was competent to act as an assessing officer and there was no inherent infirmity or defect in permitting the assessing officer to gather information and assess the value of the information himself. The Supreme Court referred to a decision of the U.S. Supreme Court in the case of Harold Withrow v. Duane Larken and observed thus :
"Even though it could be said that in a sense since the Assessing Officer was acting on behalf of the Revenue, in discharging the functions as an Assessing Officer, he was a party to the dispute, nevertheless there is no presumption of bias in such a situation. As said in Page 59 of 162 C/SCA/645/2014 CAV JUDGEMENT H.C.Narayanappa and others v. The State of Mysore and others, 1960 SCR(3) 742 at p 753:
"It is also true that the Government on whom the duty to decide the dispute rests, is substantially a party to the dispute but if the Government or the authority to whom the power is delegated acts judicially in approving or modifying the scheme, the approval or modification is not open to challenge on a presumption of bias. The Minister or the officer of the Government who is invested with the power to hear objections to the scheme is acting in his official capacity and unless there is reliable evidence to show that he is biased, his decision will not be liable to be called in question, merely because he is a limb of the Government.""
In Delhi Financial Corporation and another v. Rajiv Anand and others, 2004 11 SCC 625, the Supreme Court examined the said principle, with reference to Section 32-G of the State Financial Corporation Act, 1951, as the State Government had appointed the Managing Director of the State Financial Corporation as the authority to adjudicate the claims of the State Financial Corporation and issue certificates of recovery.
In Delhi Financial Corporation (supra) after referring to the several case laws on the subject, it was held as under :
"9. Faced with this authority, it was submitted that the observations made by the Constitution Bench are per incuriam inasmuch as this authority has not taken note of the judgment in Gullapalli Nageswara Rao case. We are unable to accept this submission. It is to be seen that there is a big difference in the facts of the two cases. The doctrine that 'no man can be a judge in his own cause' can be applied only to cases where the person concerned has a personal interest or has himself already done some act or taken a decision in the matter concerned.
Merely because an officer of a corporation is named to be the authority, does not by itself bring into operation the Page 60 of 162 C/SCA/645/2014 CAV JUDGEMENT doctrine 'no man can be a judge in his own cause'. Of course, in individual cases bias may be shown against a particular officer but in the absence of any proof of personal bias or connection merely because officers of a particular corporation are named as the authority does not mean that those officers would be biased. As has been held by the Constitution Bench, a Managing Director is a high-ranking officer. He is not personally interested in the transaction. There is no question of any bias or conflict between his interest and his duty.
In Gullapalli Nageswara Rao case the Secretary who had framed the Scheme then proceeded to hear the objections and advise the Chief Minister. It is because of the personal involvement of the Secretary that the majority took the view. Even then two Judges held that it did not follow that he was an improper person to hear the objections.
14. Thus, the authorities disclose that mere appointment of an officer of the corporation does not by itself bring into play the doctrine that 'no man can be a judge in his own cause'. For that doctrine to come into play it must be shown that the officer concerned has a personal bias or a personal interest or has personally acted in the matter concerned and/or has already taken a decision one way or the other which he may be interested in supporting. This being the law it will have to be held that the decision of the Delhi High Court is erroneous and cannot be sustained and the view taken by the Punjab and Haryana High Court is correct.
It will, therefore, have to be held that Managing Director of a financial corporation can be appointed as an authority under Section 32-G of the Act."
Thus, from the above, if we are permitted to add, it makes a little difference, whether "likelihood" could be equated with "possibility" or "probability". It all depends upon how the court looks with the judicial hindsight at the adjudicating authority and in particular at his behaviour in conducting the proceedings, his attitude towards the aggrieved Page 61 of 162 C/SCA/645/2014 CAV JUDGEMENT party, his attachment to the cause and his frame of mind, whether preconceived or not. After getting the sum total of all these, the court must ask, whether it would be enough to erode the detachment and impartiality of the adjudicating authority. If there was any likelihood of such erosion, the decision complained of must be struck down so that the streams of justice may be kept clear and pure, which is the basic requirement of administration of justice. Therefore, it would all depend on a case to case basis. In a given case, if the court finds the action to be tainted with malafides or bias, then the same could always be condemned and set at right. However, only on the apprehension of misuse of such provision, an otherwise valid statute should not be struck down or condemned.
It is equally well-settled that a mere possibility or likelihood of abuse of power does not make the provision ultra vires or bad in law. In the aforesaid context, we may quote with profit a decision of the Supreme Court in the case of People's Union for Civil Liberties v. Union of India, AIR 2004 SC 456, wherein the challenge was with regard to the constitutional validity of Prevention of Terrorism Act (15 of 2002) (POTA). The Supreme Court observed that a mere possibility of abuse or misuse of POTA could not be a ground to declare it unconstitutional. The court cannot go into and examine the need of POTA. The Supreme Court observed that it was a matter of policy. Once the legislation was passed, the Government had an obligation to exercise all available options to prevent terrorism within the bounds of the Constitution. Moreover, mere possibility of abuse could not be counted as a ground for denying the vesting of powers or for declaring a Page 62 of 162 C/SCA/645/2014 CAV JUDGEMENT statute unconstitutional.
The Supreme Court in the case of Sushil Kumar Sharma v. Union of India and others, (2005)6 SCC 281, held as under :
"16. As observed in Maulavi Hussein Haji Abraham Umarji v. State of Gujarat, Unique Butyle Tube Industries (P) Ltd. v. U.P. Financial Corpn. and Padma Sundara Rao v. State of T.N. while interpreting a provision, the Court only interprets the law and cannot legislate it. If a provision of law is misused and subjected to the abuse of the process of law, it is for the legislature to amend, modify or repeal it, if deemed necessary."
In a nine-Judge Bench decision of the Supreme Court in the case of I.R.Coelho (dead) by L.Rs. v. State of T.N., AIR 2007 SC 861, the Supreme Court made the following observations, which are worth noting :
"It is also contended that the power to pack up laws in the Ninth Schedule in absence of any indicia in Article 31B has been abused and that abuse is likely to continue. It is submitted that the Ninth Schedule which commenced with only 13 enactments has now a list of 284 enactments. The validity of Article 31B is not in question before us. Further, mere possibility of abuse is not a relevant test to determine the validity of a provision. The people, through the Constitution, have vested the power to make laws in their representatives through Parliament in the same manner in which they have entrusted the responsibility to adjudge, interpret and construe law and the Constitution including its limitation in the judiciary. We, therefore, cannot make any assumption about the alleged abuse of the power."
ARTICLE 19(1)(g) - UNREASONABLE RESTRICTION :
The above takes us to deal with the submission as Page 63 of 162 C/SCA/645/2014 CAV JUDGEMENT regards the imposition of an unreasonable restriction upon the promoters/entrepreneurs/directors in the form of debarring them from availing of any additional facilities for floating a new venture for a period of five years from the date the name of the willful defaulter is published in the list of 'willful defaulters' by the Reserve Bank of India. Such unreasonable restriction, according to the petitioners, is violative of Article 19(1)(g) of the Constitution of India i.e. the right to carry on any profession, or to carry on any occupation, trade or business.
According to the learned advocates appearing on behalf of the petitioners, even if it is accepted that the Reserve Bank of India has the power to issue the impugned circular as a policy decision to curb the menace of the NPA and in larger public interest, yet the Reserve Bank of India cannot debar any other bank or financial institution from lending money to the promoter of the company for a new venture or a project.
It is true that right to do business is a fundamental right guaranteed under Article 19(1)(g) of the Constitution of India, but this right is subject to reasonable restriction under Article 19(6) of the Constitution of India.
To test the reasonability of a restriction, the court must see the subject matter, extent of restriction, the mischief which it seeks to check, etc. In the aforesaid context, we may quote with profit a decision of the Supreme Court in the case of Md.Murtaza v. State of Assam, 2011(9) SCALE 526. The Supreme Court considered the issue as regards Article 19(1)(g) of the Page 64 of 162 C/SCA/645/2014 CAV JUDGEMENT Constitution of India although in an altogether different factual background, yet the principle propounded and explained would be applicable to the case at hand. The observations of the Supreme Court in paragraphs 10 to 18 are worth noting :
"10. It may be mentioned that to test the reasonability of a restriction we have to see the subject matter, extent of restriction, the mischief which it seeks to check, etc. The reasonableness of the restriction has to be determined in an objective manner and has to be seen from the point of view of the interest of the general public and not merely from the point of view of the persons upon whom the restrictions are imposed vide Hanif Quareshi v. State of Bihar, AIR 1958 SC 731. Moreover, the impugned action of the authorities cannot be said to be unreasonable merely because in a given case, they may operate harshly, vide State of Gujarat v. Shantilal, AIR 1969 SC 634 (vide Para 52). As observed by the Supreme Court in Laxmi Khandsari v. State of UP., AIR 1981 SC 873; Divert v. State of Gujarat, AIR 1986 SC 1323; State of Madras v. Row, 1952 SCR 597; Peerless v. Reserve Bank, AIR 1992 SC 1033; and Harakchand v. Union of India, AIR 1970 SC 1453 etc., the nature of the right alleged to have been infringed, the underlying purpose of the restriction imposed and the extent and urgency of the evil sought to be remedied thereby, disproportion of the imposition, prevailing conditions at the time etc., are the relevant considerations for determining whether the restriction is reasonable.
11. Further, as held in Jyoti Pershad v. Union Territory of Delhi, AIR 1961 SC 1602, the standard of reasonableness must also vary from age to age and be related to the adjustments necessary to solve the problems which communities face from time to time. In adjudging the validity of the restriction the Court has necessarily to approach the question from the point of view of the social interest which the State action intends to promote, vide Puthumma v. State of Kerala, AIR 1978 SC 771; P.P.
Enterprises v. Union of India, AIR 1982 SC 1016 and Jyoti Pershad v. Union Territory of Delhi (supra), etc. Page 65 of 162 C/SCA/645/2014 CAV JUDGEMENT
12. Judged by these standards the impugned action of the authorities cannot be faulted on the ground of lack of reasonableness. As stated in the counter-affidavits filed in these cases, the existing wholesale markets have become the cause of immense traffic congestion in the city, apart from causing diseases, pollution etc. Hence, shifting the wholesale markets to the outskirts of the City or beyond is clearly reasonable.
13. It must be remembered that certain matters are by their very nature such as had better be left to the administrative authorities instead of Courts themselves seeking to substitute their own views and perceptions as to what is the best solution to the problem. The present is clearly an instance where this Court should not interfere with the steps taken by the respondents to resolve a pressing problem. In matters of policy the Courts have a limited role and it should only interfere with the same when it is clearly illegal. That clearly is not the case here. The impugned action is a salutary step for undoing a mischief, which was crying out for redress for a long time, and it is not illegal.
14. As observed by the Supreme Court in Mohd. Hanif Qureshi v. State of Bihar, AIR 1958 SC 731, the Court must presume, that the legislature understands and correctly appreciates the need of its own people. The legislature is free to recognize degrees of harm, and may confine its restrictions to those where the need is deemed to be the clearest. In our opinion, the same principle would apply to executive action also, unless there is clear violation of a statute or a constitutional provision.
15. In our opinion, the State should not be hampered by the Court in dealing with evils at their point of pressure. All legislation, including delegated legislation (such as the kind we are examining) and executive action is essentially ad hoc. Since, social problems nowadays are extremely complicated, this inevitably entails special treatment for distinct social phenomena. If legislation or executive action is to deal with realities it must address itself to variations in society. The State must, therefore, Page 66 of 162 C/SCA/645/2014 CAV JUDGEMENT be left with wide latitude in devising ways and means of social control and Regulation, and the Court should not, unless compelled by the law, encroach into this field.
16. As Justice Frankfurter of the U.S. Supreme Court observed in American Federation of Labour v. American Sash and Door Co., 335 US 538 (1949) :-
"Even where the social undesirability of a law may be convincingly urged, invalidation of the law by a Court debilitates popular Democratic Government. Most laws dealing with social and economic problems are matters of trial and error. That which before trial appears to be demonstrably bad may belie prophecy in actual operation. But, even if a law is found wanting on trial, it is better that its defects should be demonstrated and removed by the legislature than that the law should be aborted by judicial fiat. Such, an assertion of judicial power defeats responsibility from those on whom in a democratic society it ultimately rests. Hence, rather than exercise judicial review Courts should ordinarily allow legislatures to correct their own mistakes wherever possible."
In our opinion the same principle would apply to executive action too.
17. Similarly, in his dissenting judgment in New State Ice Co. v. Liebemann, 285 U.S. 262 (1932), Mr. Justice Brandeis, the celebrated Judge of the U.S. Supreme Court observed that the government must be left free to engage in social experiments. Progress in the Social Sciences, as in the Physical Sciences, depends on "a process of trial and error" and Courts must not interfere with necessary experiments.
18. Justice Brandeis also observed :-
"To stay experimentation in things social and economic is a grave responsibility. Denial of the right to experiment may be fraught with serious consequences to the Nation.""Page 67 of 162
C/SCA/645/2014 CAV JUDGEMENT Thus, from the above, it could be said that having regard to the object with which the Reserve Bank of India issued the Master Circular and the policy decision to declare the promoters of the company as willful defaulters, it could not be said that the same is an unreasonable restriction violating Article 19(1)(g) of the Constitution of India.
To sum up, the impugned circular does not suffer from the vice of lack of power. It has been issued in the interest of the banking business and is, thus, in public interest. It seeks to ensure greater transparency and uniformity in identification and treatment of the willful defaulters. It targets defaulters of dues in excess of Rs.25 lac, thus laying down the threshold limit for application of the circular. It applies to only those defaulters who can be categorized as "willful" as defined in the circular. It, thus, does not cover those borrowers who are unable to pay the debt without there being any element of willfulness. Surely, no borrower can claim a vested right to seek financial assistance from a bank or a financial institution no matter how willful or chronic his defaults in repayment of past dues may have been. The circular, therefore, in general terms, is not arbitrary.
However, the matter does not rest over here. There is a grey area which we have been able to identify so far as the issue of unreasonable restriction and arbitrariness in the policy decision of the Reserve Bank of India is concerned.
Page 68 of 162C/SCA/645/2014 CAV JUDGEMENT We have noticed that the Master Circular which provides for the guidelines pertaining to "willful default" and "willful defaulter" embraces within it even the directors of the company.
We may, once again, at the cost of repetition, highlight few provisions of the Circular which, in our opinion, deserve consideration. In clause (2.5), which relates to penal measures, sub-clause (d) reads as under :
"(d) A covenant in the loan agreements, with the companies in which the banks/notified FIs have significant stake, should be incorporated by the banks/FIs to the effect that the borrowing company should not induct a person who is a promoter or director on the Board of a company which has been identified as a willful defaulter as per the definition at paragraph 2.1 above and that in case, such a person is found to be on the Board of the borrower company, it would take expeditious and effective steps for removal of the person from its Board."
Clause (5) is with regard to reporting names of the directors. Clauses (5.1) and (5.2) read as under :
"5.1 Need for Ensuring Accuracy RBI/Credit Information Companies disseminate information on non-suit filed and suit filed accounts respectively, as reported to them by the banks/FIs and responsibility for reporting correct information and also accuracy of facts and figures rests with the concerned banks and financial institutions. Therefore, banks and financial institutions should take immediate steps to up- date their records and ensure that the names of current directors are reported. In addition to reporting the names Page 69 of 162 C/SCA/645/2014 CAV JUDGEMENT of current directors, it is necessary to furnish information about directors who were associated with the company at the time the account was classified as defaulter, to put the other banks and financial institutions on guard. Banks and FIs may also ensure the facts about directors, wherever possible, by cross-checking with Registrar of Companies.
5.2 Position regarding Independent and Nominee directors Professional Directors who associate with companies for their expert knowledge act as independent directors. Such independent directors apart from receiving director's remuneration do not have any material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries, which in the judgment of Board may affect their independent judgment. As a guiding principle of disclosure, no material fact should be suppressed while disclosing the names of a company that is a defaulter and the names of all directors should be published. However, while doing so, a suitable distinguishing remark should be made clarifying that the concerned person was an independent director. Similarly the names of directors who are nominees of government or financial institutions should also be reported but a suitable remark 'nominee director' should be incorporated. Therefore, against the names of Independent Directors and Nominee Directors, they should indicate the abbreviations "Ind" and "Nom" respectively in brackets to distinguish them from other directors."
Thus, the above makes it clear that all the directors irrespective of their type are brought within the purview of the circular for the purpose of declaring them as willful defaulters. Although in clause (5.2), the Reserve Bank of India has tried to clarify the position as regards the independent and nominee directors, yet a plain reading of clause (5.2) would suggest that even the independent and nominee directors are not spared but it would be within the discretion of the committee of high Page 70 of 162 C/SCA/645/2014 CAV JUDGEMENT functionaries headed by the Executive Director to take a decision as regards the role of the independent and nominee directors.
The circular speaks about "director" and "independent and nominee director". The classification of the directors under the Companies Act is as under :
"A. Classification under the Companies Act Categories of Directors The Companies Act refers to the following two specific categories of Directors:
1. Managing Directors; and
2. Whole-time Directors.
A Managing Director is a Director who has substantial powers of management of the affairs of the company subject to the superintendence, control and direction of the Board in question. A Whole-time Director includes a Director who is in the whole-time employment of the company, devotes his whole-time of working hours to the company in question and has a significant personal interest in the company as his source of income.
Every public company and private company, which is a subsidiary of a public company, having a share capital of more than Five Crore rupees (Rs. 5,00,00,000/-) must have a Managing or Whole-time Director or a Manager.
Further classification of Directors Based on the circumstances surrounding their appointment, the Companies Act recognizes the following further types of Directors:
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1. First Directors: Subject to any regulations in the Articles of a company, the subscribers to the Memorandum of Association, or the company's charter or constitution ("Memorandum"), shall be deemed to be the Directors of the company, until such time when Directors are duly appointed in the annual general meeting ("AGM").
2. Casual vacancies: Where a Director appointed at the AGM vacates office before his or her term of office expires in the normal course, the resulting vacancy may, subject to the Articles, be filled by the Board. Such person so appointed shall hold office up to the time which the Director who vacated office would have held office if he or she had not so vacated such office.
3. Additional Directors: If the Articles specifically so provide or enable, the Board has the discretion, where it feels it necessary and expedient, to appoint Additional Directors who will hold office until the next AGM. However, the number of Directors and Additional Directors together shall not exceed the maximum strength fixed in the Articles for the Board.
4. Alternate Director: If so authorized by the Articles or by a resolution passed by the company in general meeting, the Board may appoint an Alternate Director to act for a Director ("Original Director"), who is absent for whatever reason for a minimum period of three months from the State in which the meetings of the Board are ordinarily held. Such Alternate Director will hold office until such period that the Original Director would have held his or her office. However, any provision for automatic re- appointment of retiring Directors applies to the Original Director and not to the Alternate Director.
5. 'Shadow' Director: A person, who is not appointed to the Board, but on whose directions the Board is accustomed to act, is liable as a Director of the company, unless he or she is giving advice in his or her professional capacity. Thus, such a 'shadow' Director may be treated as an 'officer in default' under the Companies Act.
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6. De facto Director: Where a person who is not actually appointed as a Director, but acts as a Director and is held out by the company as such, such person is considered as a de facto Director. Unlike a 'shadow' Director, a de facto Director purports to act, and is seen to the outside world as acting, as a Director of the company. Such a de facto Director is liable as a Director under the Companies Act.
7. Rotational Directors: At least two-thirds of the Directors of a public company or of a private company subsidiary of a public company have to retire by rotation and the term "rotational Director" refers to such Directors who have to retire (and may, subject to the Articles, be eligible for re-appointment) at the end of his or her tenure.
8. Nominee Directors: They can be appointed by certain shareholders, third parties through contracts, lending public financial institutions or banks, or by the Central Government in case of oppression or mismanagement. The extent of a nominee Director's rights and the scope of supervision by the shareholders, is contained in the contract that enables such appointments, or (as appropriate) the relevant statutes applicable to such public financial institution or bank. However, nominee Directors must be particularly careful not to act only in the interests of their nominators, but must act in the best interests of the company and its shareholders as a whole.The fixing of liabilities on nominee Directors in India does not turn on the circumstances of their appointment or, indeed, who nominated them as Directors. Chapter 4 and Chapter 5 that follow set out certain duties and liabilities that apply to, or can be affixed on, Directors in general. Whether nominee Directors are required by law to discharge such duties or bear such liabilities will depend on the application of the legal provisions in question, the fiduciary duties involved and whether such nominee Director is to be regarded as being in control or in charge of the company and its activities. This determination ultimately turns on the specific facts and circumstances involved in each case.
Page 73 of 162C/SCA/645/2014 CAV JUDGEMENT B. Classification under the Listing Agreement The Securities Contracts (Regulation) Act, 1956, read with the rules and regulations made thereunder, requires every company desirous of listing its shares on a recognized Indian stock exchange, to execute a listing agreement ("Agreement") with such Indian stock exchange. This Agreement is in a standard format (prescribed by the Securities Exchange Board of India ("SEBI")), as amended by SEBI from time to time. The Agreement provides for the following further categories of Directors:
Categories under Listing Agreement
1. Executive Director;
2. Non-executive Director; and
3. Independent Director.
Executive and non-executive Directors An Executive Director can be either a Whole-time Director of the company (i.e., one who devotes his whole time of working hours to the company and has a significant personal interest in the company as his source of income), or a Managing Director (i.e., one who is employed by the company as such and has substantial powers of management over the affairs of the company subject to the superintendence, direction and control of the Board). In contrast, a non- executive Director is a Director who is neither a Whole-time Director nor a Managing Director. Clause 49 of the Agreement prescribes that the Board shall have an optimum combination of executive and non-executive Directors, with not less than fifty percent (50%) of the Board comprising non-executive Directors. Where the Chairman of the Board is a non-executive Director, at least one-third of the Board should comprise independent Directors and in case he is an executive Director, at least half of the Board should comprise independent Directors. Where the non-executive Chairman is a promoter of the company or is related to any promoter or person occupying management positions at the Board level or at one Page 74 of 162 C/SCA/645/2014 CAV JUDGEMENT level below the Board, at least one-half of the Board of the company shall consist of independent Directors.
Independent Directors The Agreement defines an "Independent Director" as a non-executive Director of the company who: