w w w . L a w y e r S e r v i c e s . i n



Viswapriya Financial Services & Securities Limited rep. v/s The Executive Director & Another

    W.P.No.27246 of 2005

    Decided On, 14 September 2005

    At, High Court of Judicature at Madras

    By, THE HONOURABLE MR. JUSTICE D.MURUGESAN

    For the Petitioner: K.Alagirisamy, Senior Counsel for Menon & Goklaney, Associates. For the Respondents: R. Krishnamoorthy, Senior Counsel for T. Poornam & P. Neelakantan, Advocate.



Judgment Text

(Petition filed under Article 226 of The Constitution of India, praying to issue a Writ of Certiorari, calling for the records in connection with the order dated 6.8.2005 under Ref.Nil passed by the 1st respondent and quash the same.)


The petitioner company was incorporated on 13.5.91 under the provisions of the Companies Act, 1956. As the petitioner company is a Non Banking Financial Company, in terms of the amendment to the Reserve Bank of India Act in 1997, it should obtain a Certificate of Registration from the Reserve Bank of India. Such a Certificate of Registration was granted to the petitioner company by the Reserve Bank of India on 20.4.98. By the order dated 6.8.2005, the said Certificate has been cancelled. Questioning the said order, the present writ petition is filed basically on the following three grounds:-


(1) As per the first proviso to sub-section (6) of Section 45-IA, before the Certificate of Registration is cancelled, the Reserve Bank of India ought to have given an opportunity to the petitioner company for taking necessary steps to comply with such provisions or fulfilment of such condition. In the absence of such opportunity, the impugned order is unsustainable.


(2) In the show cause notice dated 18.10.2004, the petitioner was called upon to show cause as to why the company was carrying on the business of a non-banking financial institution without having a net owned fund (NOF) of Rs.25 lakhs, which is mandatory under clause (b) of sub-section (1) of Section 45-IA of the Reserve Bank of India Act, 1934 (hereinafter referred to as the "Act"); that the company had accepted/continued to hold public deposits in violation of the provisions of Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998; that the company failed to produce the documents/information required by the Reserve Bank of India and thereby violated the provisions of Section 45N(2) of the Act. However, the impugned order was passed on other grounds namely, that the NOF of the company continued to be negative as against the required statutory minimum level of Rs.25 lakhs on account of the investments in the shares of two Non Banking Financial Companies viz., Triad Trading Services Limited and Pentagon Trading Services Limited and credit exposure to a group company viz., Subhiksha Enterprises Private Limited; that the company had also engaged in raising funds from individual public by way of issue of Pass Through Certificates. The grounds as to the credit exposure to a group company viz., Subhiksha Enterprises Private Limited and the raising of funds from individual public by way of issue of Pass Through Certificates were not the reasons elicited in the show cause notice.


(3) In terms of the second proviso to sub-section (6) of Section 45-IA, before making any order of cancellation of certificate of registration, the company shall be given a reasonable opportunity of being heard. By that section, it is incumbent on the part of the respondent, who has conducted the personal hearing, to pass orders. In this case, the personal hearing was conducted by one officer and the final order was passed by the other officer.


2. I have heard in detail Mr.K.Alagirisamy, learned Senior Counsel for the petitioner company and Mr.R.Krishnamoorthy, learned Senior Counsel for the respondent bank.


3. Sub-section (6) of Section 45-IA reads as under:-


"The bank may cancel a certificate of registration granted to a non-banking financial company under this section if such company--


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


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


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


(iv) fails--


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


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


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


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


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


PROVIDED FURTHER that before making any order of cancellation of certificate of registration, such company shall be given a reasonable opportunity of being heard."


4. Sub-section (7) of Section 45-IA reads as under:-


"A company aggrieved by the order of rejection of application for registration or cancellation of certificate of registration may prefer an appeal, within a period of thirty days from the date on which such order of rejection or cancellation is communicated to it, to the Central Government and the decision of the Central Government where an appeal has been preferred to it, or of the bank where no appeal has been preferred, shall be final:


PROVIDED that before making any order of rejection of appeal, such company shall be given a reasonable opportunity of being heard.


Explanation: For the purpose of this section--


(I) "net owned fund" means--


(a) the aggregate of the paid-up equity capital and free reserves as disclosed in the latest balance sheet of the company after deducting therefrom--


(i) accumulated balance of loss;


(ii) deferred revenue expenditure; and


(iii) other intangible assets; and


(b) further reduced by the amounts representing--


(1) investments of such company in shares of--


(i) its subsidiaries;


(ii) companies in the same group;


(iii) all other non-banking financial companies; and


(2) the book value of debentures, bonds, outstanding loans and advances (including hire-purchase and lease finance) made to, and deposits with--


(i) subsidiaries of such company; and


(ii) companies in the same group, to the extent such amount exceeds ten percent, of (a) above.


(II) "subsidiaries" and "companies in the same group" shall have the same meanings assigned to them in the Companies Act, 1956 (1 of 1956)."


5. Mr.K.Alagirisamy, learned Senior Counsel for the petitioner would submit that in view of the non-compliance of the first proviso to sub-section (6) of Section 45-IA, the provisions of sub-section (7) of Section 45-IA as regards the filing of appeal does not apply to the facts of this case and in such event, the petitioner company is entitled to file the writ petition.


6. On the other hand, it is the case of Mr.R.Krishnamoorthy, learned Senior Counsel for the respondent bank that the first proviso to sub-section (6) of Section 45-IA does not apply to the facts of this case and in that event, the petitioner has got an effective remedy of appeal under sub-section (7) of Section 45-IA before the Central Government and, therefore, the writ petition is liable to be dismissed on the ground of alternative remedy.


7. As a decision on the challenge to the impugned order on the ground of alternative remedy will have a direct bearing on the other two issues raised by the petitioner, it would be appropriate to deal with the first ground at first. In terms of the first proviso to sub-section (6) of Section 45-IA, before canceling a certificate of registration on the ground that the non-banking financial company has failed to comply with the provisions of clause (ii) or has failed to fulfill any of the conditions referred to in clause (iii), the company shall be given an opportunity for taking necessary steps to comply with such provisions or fulfillment of such condition. Clause (ii) of sub-section (6) relates to the failure on the part of the company to comply with any condition subject to which the certificate of registration had been issued and clause (iii) of sub-section (6) relates to non-compliance of the conditions referred to in clauses (a) to (g) of sub-section (4). There is no difficulty to hold that the facts in issue do not relate to clause (iii) of sub-section (6) of Section 45-IA, as the failure on the part of the company is not in respect of conditions referred to in clauses (a) to (g) of sub-section (4). According to the learned Senior Counsel for the petitioner, the issue falls under clause (ii) of sub-section (6), since the show cause notice proceeds on the ground of failure to comply with the conditions of certificate of registration. Hence, the first proviso shall be applicable. However, it is the case of Mr.R.Krishnamoorthy, learned Senior Counsel for the respondent bank that the ground on which the order of cancellation was made falls only under clauses (iv), (v) of sub-section (6). Clause (iv) of sub-section (6) relates to compliance of the direction issued by the bank under the provisions of Chapter III-B and failure to submit or offer for inspection the books of accounts and other relevant documents when so demanded by an inspecting authority of the bank. Clause (v) relates to a prohibition from accepting deposit by an order made by the bank.


8. Insofar as the company carrying on the business of a non-banking financial institution without having a net owned fund (NOF) of Rs.25 lakhs, the provisions of clause (b) of sub-section (1) of Section 45-IA are referable. It is one of the requirement for registration and mandatory for a company to have the net owned fund of twenty five lakh rupees or such other amount not exceeding two hundred lakhs, as the bank may, by notification in the Official Gazette, specify. This is one of the pre-conditions for registration. This condition cannot be construed as one of the conditions imposed in the certificate of registration. Only in the event a condition is imposed in the certificate of registration and if such condition is not complied with, the petitioner could invoke clause (ii) of sub-section (6) of Section 45-IA of the Act. By the communication of the respondent-bank dated 5.1.2004, the petitioner was informed that the net owned fund of the company continued to be negative in contravention of the provisions of Section 45-IA of the Act and thereby was directed to stop doing the non banking financial business until its net owned fund reached the minimum stipulated level of Rs.25 lakhs. As the said direction was not complied with as to the minimum stipulated level of Rs.25 lakhs for the conduct of non-banking financial company, in my opinion, clause (iv)(a) of sub-section (6) of Section 45-IA would alone apply, which relates to the failure on the part of the company to comply with any direction issued by the bank under the provisions of Chapter III-B. In this regard, clause (c)(i) of sub-direction (4) of direction 4 under Part-II of the Non Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 can also be referred, which state that a loan company or an investment company having net owned fund of twenty five lakh of rupees or more, may accept or renew public deposit. Clause (d)(i) of sub-direction (4) relates to a condition that a loan company or an investment company shall continue to maintain net owned fund of twenty five lakh of rupees or more so long as the company continues to be a non-banking financial company. Clause (i) of sub-direction (1) of direction 4 states that "no non-banking financial company having net owned fund of twenty five lakh of rupees and above shall accept public deposit unless it has obtained minimum investment grade or other specified credit rating for fixed deposits from any one of the approved credit rating agencies at least once a year and a copy of the rating is sent to the Reserve Bank of India along with return on prudential norms". The show cause notice and the impugned order were passed on the non-compliance of the above directions by the petitioner company which, in my considered view, shall only fall under clause (iv) of sub-section (6) of Section 45-IA of the Act and not under clause (ii).


9. Insofar as the last ground in the show cause notice regarding the failure on the part of the company to produce the documents/information, the same shall fall under clause (iv)(c) of sub-section (6) of Section 45-IA, as the show cause notice was issued only for the non-compliance of the provisions of clauses (iv) and (v) of sub-section (6) of Section 45-IA of the Act. The first proviso regarding the opportunity to the petitioner company for taking necessary steps to comply with such provisions or fulfillment of such condition does not apply. Only in the event of failure on the part of the company to comply with the provisions of clause (ii) or clause (iii) of sub-section (6), the company is entitled to an opportunity for taking necessary steps to comply with such provisions or fulfillment of such condition. In that view of the matter, the contention of the learned Senior Counsel for petitioner that for want of opportunity under the first proviso to sub-section (6) of Section 45-IA the writ petition is maintainable cannot be accepted. In this regard, the recent judgment of the Supreme Court in "State of H.P. And others Vs. Gujarat Ambuja Cement Ltd., and another (JT 2005 (6) SC 298)" could be usefully referred to. In that case, Their Lordships of the Supreme Court have extensively discussed the jurisdiction of the Court to entertain writ petition while existence of an alternative remedy and finally laid down the law that the rule of exclusion of writ jurisdiction by availability of alternative remedy is a rule of discretion and not one of compulsion and the Court must consider the pros and cons of the case and then may interfere if it comes to the conclusion that the petitioner seeks enforcement of any of the fundamental rights or where there is failure of principles of natural justice or where the orders or proceedings are wholly without jurisdiction or the vires of an Act is challenged. In order to entertain a writ petition, this Court must satisfy as to whether the writ petition falls under any of the above categories. First of all, the writ

Please Login To View The Full Judgment!

petition is not for enforcement of any fundamental right, as the certificate of registration is only a statutory right. Secondly, the failure of principles of natural justice as contended by the learned Senior Counsel for petitioner by placing reliance on the first proviso to sub-section (6) of Section 45-IA has not been accepted by me. This Court cannot entertain the writ petition, as the petitioner has got an effective remedy of appeal under sub-section (7) of Section 45-IA of the Act. In fact, Their Lordships of the Supreme Court, in paragraph 14 of the above judgment, have held that "where hierarchy of appeals is provided by the statute, party must exhaust the statutory remedies before resorting to writ jurisdiction". 10. Applying the above principles, I am of the view that the writ petition cannot be entertained, as the petitioner has got an effective remedy of appeal and, on this ground, the writ petition must fail. 11. As I have held that the writ petition cannot be entertained on the ground of statutory alternative remedy, I am not inclined to go into the other questions as any findings rendered on those questions will have a direct bearing on the appellate authority, in the event the petitioner files an appeal. Hence, the writ petition is dismissed. The petitioner is at liberty to resort to the appellate remedy. The impugned order was served on the petitioner on 20.8.2005 and the writ petition was filed on 23.8.2005. The period of pendency of the writ petition from 23.8.2005 till the date of this order shall be excluded while computing the period of limitation in preferring appeal. No costs. Consequently, W.P.M.P.No.29679 of 2005 is also dismissed.
O R