Gujarat High Court
Neelkanth Lease Finance Ltd vs Reserve Bank Of India on 15 February, 2023
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
NEUTRAL CITATION
C/SCA/13433/2022 JUDGMENT DATED: 15/02/2023
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 13433 of 2022
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE BHARGAV D. KARIA
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1 Whether Reporters of Local Papers may be allowed
to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy
of the judgment ?
4 Whether this case involves a substantial question
of law as to the interpretation of the Constitution
of India or any order made thereunder ?
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NEELKANTH LEASE FINANCE LTD.
Versus
RESERVE BANK OF INDIA
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Appearance:
JIGER K MEHTA(7548) for the Petitioner(s) No. 1
KRUNAL S MEHTA(9227) for the Petitioner(s) No. 1
MR AMAR N BHATT(160) for the Respondent(s) No. 1
NOTICE SERVED for the Respondent(s) No. 2
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CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
Date : 15/02/2023
ORAL JUDGMENT
1. Heard learned advocate Mr. Jiger K. Mehta for Page 1 of 27 Downloaded on : Sun Sep 17 21:52:59 IST 2023 NEUTRAL CITATION C/SCA/13433/2022 JUDGMENT DATED: 15/02/2023 undefined the petitioner and learned advocate Mr. Amar Bhatt for the respondent no.1.
2. Rule. Learned advocate Mr. Amar Bhatt waives service of notice of rule on behalf of respondent no.1
3. By this petition under Article 226 of the Constitution of India, the petitioner has prayed for the following reliefs:
"A) Your Lordships may be pleased to admit and allow this petition. B) Your Lordship may be pleased to issue writ of mandamus or certiorari or any other appropriate writ order or direction to quash and set aside order passed by respondent authority dated 17/12/2018 and 26/05/2020 as same are illegal, arbitrary, and against the principle of natural justice. C) Pending admission hearing and final disposal of this petition, this hon'ble court may be pleased to stay implementation and execution of the impugned orders dated 17/12/2018 and 26/05/2020 passed by respondent authorities and direct the respondents, Page 2 of 27 Downloaded on : Sun Sep 17 21:52:59 IST 2023 NEUTRAL CITATION C/SCA/13433/2022 JUDGMENT DATED: 15/02/2023 undefined their officers, agents, men, etc. to allow petitioner to carry on business without any hindrance.
D) Any other and further reliefs as this Hon'ble court may deem fit and proper in the interest of justice."
4. Brief facts of the case are as under:
4.1) The petitioner company was registered as Non-Banking Financial Company (NBFC) with respondent no.1 - Reserve Bank of India (RBI), Ahmedabad holding certificate of Registration No. 01.00186 dated 27th March 1998.
4.2) The Reserve Bank of India has issued Notification being No. DNBS.132/CGM(VSNM)-99 dated 21.04.1999 to the effect that NBFC's which commences the business on or after 21.04.1999 are compulsorily required to attain a minimum Net Owned Fund(NOF) of Rs. 2 crore instead of 25 lakhs. Thereafter it was Page 3 of 27 Downloaded on : Sun Sep 17 21:52:59 IST 2023 NEUTRAL CITATION C/SCA/13433/2022 JUDGMENT DATED: 15/02/2023 undefined notified by notification No.DNBR.007/ CGM(CDS)- 2015 dated 27.03.2015 to the effect that all Non Banking Financial Companies are mandatorily required to attain a minimum Net Owned Fund of Rs. 2 crore by end of March 2017 as per the milestone given as under:
1 crore by the end of March 2016 2 crore by the end of March 2017 4.3) Therefore the companies existed before 21.04.1999 have to attain the above minimum Net Owned Fund in addition to the new companies applying for grant of Certificate of Registration(CoR) to carry on business of an NBFC.
4.4) It is the case of the petitioner that section 45-IA of the Reserve Bank of India Act 1934 (For short, "the Act, 1934") provided a period of 3 years to meet the Page 4 of 27 Downloaded on : Sun Sep 17 21:52:59 IST 2023 NEUTRAL CITATION C/SCA/13433/2022 JUDGMENT DATED: 15/02/2023 undefined requirement of having a 25 lakhs Net Owned Fund, during which they could continue to carry on business despite not meeting a mandatory licensing condition and furthermore said section also provided that Reserve bank of India after recording its reasons for decisions in writing may extend above period of 3 years to maintain the required Net Owned Fund, however extended time should not exceed 6 years.
4.5) It is the case of the petitioner that on 09.07.2018, respondent authority sent a show cause notice to the petitioner stating that petitioner company has failed to achieve Net Owned Fund of Rs. 2 crore before 01.04.2017, thus the said action is in violation of direction issued by the Reserve Bank of India and the petitioner was invited for clarification for the proposed action by the respondent authority. Page 5 of 27 Downloaded on : Sun Sep 17 21:52:59 IST 2023
NEUTRAL CITATION C/SCA/13433/2022 JUDGMENT DATED: 15/02/2023 undefined 4.6) The petitioner sent reply to the said show cause notice stating that petitioner company has already complied with the norms and direction of Reserve Bank of India and one of the company namely M/S Skylark Pharmaceuticals Pvt. Ltd. was in financial crisis and it was not in a position to repay its loan amount to petitioner company, but now it has been trying to reduce the loan amount to the maximum possible extent. It is the case of the petitioner that the petitioner company has improved its Net Owned Fund to the tune of Rs. 2,51,53,000/- as on 04.04.2018 which is much before than show cause notice.
4.7) It is the case of the petitioner that the respondent authority without considering the reply of the petitioner and without assigning any reason whatsoever Page 6 of 27 Downloaded on : Sun Sep 17 21:52:59 IST 2023 NEUTRAL CITATION C/SCA/13433/2022 JUDGMENT DATED: 15/02/2023 undefined passed order dated 17.12.2018 by only stating that reply dated 16.07.2018 was not found to be satisfactory and Certificate of Registration dated 27.03.1998 was ordered to be cancelled.
4.8) The petitioner thereafter approached respondent no 2 as petitioner was aggrieved and dissatisfied with the order of the respondent authority to cancel the Certificate of Registration and it is the case of the petitioner that the said authority also without considering the case of the petitioner rejected the appeal of the petitioner by confirming the order passed by respondent no 1 vide order dated 26.05.2020. 4.9) Being aggrieved by such impugned orders, the petitioner has preferred the present petition.
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5. Learned advocate for the petitioner submitted that NOF was reported negative in the Statutory Auditor's Certificate(SAC) for the years 2015-2016 and 2016-2017 and positive at Rs. 79 lakh in the SAC for the year 2017- 2018. It was submitted that though the company was not complying with NOF requirement as per SAC, yet there has been not a single communication from the RBI informing the petitioner company to take steps to improve the NOF position. 5.1) It was submitted that the petitioner was deprived of an opportunity to take corrective steps as envisaged under sub- section (6) of section 45-IA of the Act, 1934 before cancellation of its CoR. It was submitted that the auditors of the petitioner company instead of applying extant norms, applied their own understanding on the concept of same group Page 8 of 27 Downloaded on : Sun Sep 17 21:52:59 IST 2023 NEUTRAL CITATION C/SCA/13433/2022 JUDGMENT DATED: 15/02/2023 undefined companies and classified M/s. Skylark Pharmaceuticals Pvt. Ltd. as their group company all these years and company's exposure to M/s. Skylark Pharmaceuticals Pvt. Ltd. was considered as group exposure and deducted from owned funds to arrive at NOF an therefore, as a result thereof, the petitioner company's NOF was reduced to negative in 2015-2016 and 2016-2017 and to below Rs. 200 lakh in 2017-2018. 5.2) It was submitted that the petitioner company has no subsidiaries since beginning and further as per the extant norms of same group company as per section 370(1B) of the Companies Act, 1956, M/s. Skylark Pharmaceuticals Pvt. Ltd is not a group company and any exposure of the company to them from the beginning i.e. year 2012 when the company started lending to them shall not have any bearing on calculation of NOF Page 9 of 27 Downloaded on : Sun Sep 17 21:52:59 IST 2023 NEUTRAL CITATION C/SCA/13433/2022 JUDGMENT DATED: 15/02/2023 undefined of the company.
5.3) Learned advocate Mr. Mehta submitted that the petitioner company being a small entity, it was not aware as to what constituted a group company and how exposure to it impacted calculation of NOF and therefore, the petitioner company placed heavy reliance on the auditors understanding of the subject. It was therefore that in reply to the show cause notice, the petitioner company referred to Ms. Skylark Pharmaceutical Pvt. Ltd. as a group company. It was submitted that had this concept been clear to them, it would have certainly not made such a mistake which led to the cancellation of CoR.
5.4) It was submitted that the petitioner company reduced its exposure in M/s. Skylark Pharmaceuticals Pvt. Ltd. and achieved NOF Page 10 of 27 Downloaded on : Sun Sep 17 21:52:59 IST 2023 NEUTRAL CITATION C/SCA/13433/2022 JUDGMENT DATED: 15/02/2023 undefined of Rs. 251.53 lakhs as on 4th April, 2018. 5.5) It was submitted that the respondent authority failed to appreciate that M/s. Skylark Pharmaceutical Pvt. Ltd. is paying interest and loan amount regularly wherein TDS is also applied by the petitioner. 5.6) It was submitted that respondent authority instead of applying extant norms, applied their own understanding and authority stick to the particular date i.e. 1.04.2017. It was submitted that the respondent authority itself reconsidered its decision in the matter of one company M/S Juhie (India) Pvt. Ltd and decided that it was not necessary to cancel Certificate of Registration. Further the case of the petitioner is decided without any consistency as respondent authority has also considered case of M/S Countwell Management Page 11 of 27 Downloaded on : Sun Sep 17 21:52:59 IST 2023 NEUTRAL CITATION C/SCA/13433/2022 JUDGMENT DATED: 15/02/2023 undefined services pvt. Ltd. and decided it was not necessary to cancel the Certificate of Registration.
5.7) Reliance was placed upon the decision of Delhi High Court in Writ petition (C) 2384 of 2020 in case of Shubh Laxmi Capital Limited v. Reserve Bank of India wherein Division Bench of this Court has set aside orders of respondent authority and remanded the matter back to the respondent authority. It was submitted that M/S Juhie (India) Pvt. Ltd has maintained Net Owned Fund by now and Certificate of Registration was restored by the appellate authority and therefore petitioner has similar case and Certificate of Registration of the petitioner is required to be restored in the interest of justice.
5.8) It was submitted that in similar Page 12 of 27 Downloaded on : Sun Sep 17 21:52:59 IST 2023 NEUTRAL CITATION C/SCA/13433/2022 JUDGMENT DATED: 15/02/2023 undefined circumstances, as respondent authority had taken unwarranted, arbitrary, illegal and discriminatory decision, M/s Nahar Finance & Leasing Ltd. had approached Madras High Court challenging the action of cancellation of certificate of registration and Division Bench of Madras High Court had allowed the petition of the said company and restored the Certificate of Registration. The said M/s. Nahar Finance and Leasing Limited did not avail the available statutory remedy and therefore the said decision was not affirmed by the Hon'ble Apex Court and remitted said case to appellate authority without going to the merits of the matter.
5.9) It was submitted that Chartered Accountant of petitioner's company has certified that petitioners company has complied with RBI requirement of minimum Net Owned Fund of Rs. 2 crore on various dates Page 13 of 27 Downloaded on : Sun Sep 17 21:52:59 IST 2023 NEUTRAL CITATION C/SCA/13433/2022 JUDGMENT DATED: 15/02/2023 undefined of year 2018-2019. The petitioner company has maintained Net Owned Fund on 04.04.2018 which is much prior than the date of Show cause notice. It was therefore, submitted that the impugned orders are required to be quashed and set aside.
6. On the other hand, learned advocate Mr. Amar Bhatt for respondent no.1 submitted that there is no violation of principles of natural justice.
6.1) It was submitted that RBI in terms of provisions of Section 45-IA(1)(b) of the Act, has decided that no Non-Banking Financial Company (NBFC) can carry on the business of an Non-Banking Financial Institution (NBFI) without having a Net Owned Fund (NOF) of Rs.25.00 lakh or such other amount, not exceeding Rs.200.00 lakh, as the RBI may, by notification in the Page 14 of 27 Downloaded on : Sun Sep 17 21:52:59 IST 2023 NEUTRAL CITATION C/SCA/13433/2022 JUDGMENT DATED: 15/02/2023 undefined Official Gazette, specify. It was submitted that in terms of their notification No. DNBS.132/CGM (VSNM)-99 dated 20th April, 1999, the requirement of minimum NOF for new companies applying for grant of CoR to commence business of an NBFC was raised from Rs.25.00 lakh to Rs 200.00 lakh. However, the minimum NOF for companies that were already in existence before 21st April, 1999 was retained at Rs.25.00 lakh. Subsequently RBI vide circular RBI/2014-15/520 DNBR (PD) CC.No.024/03.10.001/2014-15 on Revised Regulatory Framework for NBFCs read with notification No. DNBR.007/CGM (CDS)-2015, both dated 27th March, 2015, specified Rs.200.00 lakh as the NOF required for all NBFCs to commence or carry on the business of NBFIs. However, the NBFCs holding a CoR issued by RBI and having an NOF less than Rs.200.00 lakh were permitted to carry on the business of NBFIs provided such Page 15 of 27 Downloaded on : Sun Sep 17 21:52:59 IST 2023 NEUTRAL CITATION C/SCA/13433/2022 JUDGMENT DATED: 15/02/2023 undefined companies achieve an NOF of Rs.200.00 lakh before 1st April, 2017. It was submitted that as per para No.4.3 of the Revised Regulatory Framework for NBFC RBI/2014-15/299 DNBR (PD) CC. No. 002/03.10.001/2014-15 dated 10th November, 2014 the NBFCs failing to achieve the prescribed ceiling within the stipulated time period shall not be eligible to hold the CoR as NBFCs and RBI will initiate the process for cancellation of CoR against such NBFCS.
6.2) It was submitted that the appellant company was holding CoR issued by them on the date of issuance of the aforementioned directions. However, the appellant company failed to comply with the requirement of NOF of Rs.200.00 lakh by the end of March 2017, in terms of the above said notification. Thus, the petitioner company's failure to comply with the prescribed NOF of Rs.200.00 Page 16 of 27 Downloaded on : Sun Sep 17 21:52:59 IST 2023 NEUTRAL CITATION C/SCA/13433/2022 JUDGMENT DATED: 15/02/2023 undefined lakh by the end of March 2017 was in violation of directions issued by RBI and accordingly, the petitioner company was called upon vide their letter DNBS(AH) No.26/01.05.002/2018-19 dated 9th July, 2018 to show cause within 15 days of the receipt of the said notice as to why the CoR issued to it should not be cancelled under Section 45-IA(6) of the Act and penal action be not initiated against the petitioner company for the offences punishable under Section 58B of the Act, 1934.
6.3) It was submitted that the petitioner company replied to the Show Cause Notice (SCN) vide letter dated 16th July, 2018 and as the said reply was not found to be satisfactory, RBI has stated that it cancelled the CoR of the petitioner company vide order dated 17th December, 2018 in exercise of the power conferred under Page 17 of 27 Downloaded on : Sun Sep 17 21:52:59 IST 2023 NEUTRAL CITATION C/SCA/13433/2022 JUDGMENT DATED: 15/02/2023 undefined Section 45-IA(6) of the Act.
7. Considering the rival submissions made by learned advocates for the respective parties, relevant provisions of the RBI Act which are germane to adjudicate the controversy raised in this petition are as under :
"[45IA. Requirement of registration and net owned fund.
xxx (6) 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 Page 18 of 27 Downloaded on : Sun Sep 17 21:52:59 IST 2023 NEUTRAL CITATION C/SCA/13433/2022 JUDGMENT DATED: 15/02/2023 undefined 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 account 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 provision or fulfillment 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.Page 19 of 27 Downloaded on : Sun Sep 17 21:52:59 IST 2023
NEUTRAL CITATION C/SCA/13433/2022 JUDGMENT DATED: 15/02/2023 undefined (7) 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 purposes 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;
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(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 per cent of (a) above.
(II) "subsidiaries" and "companies in the same group" shall have the same meanings assigned to them in the Companies Act, 1956."
8. RBI by notification dated 27.03.2015 specified Rs. 200 Lakh as the NOF required for NBFCs to commence or carry on the business of NBFC. All NBFCs holding CoR certificate issued by RBI and having NOF of less than Rs. 200 Lakh were permitted to carry on business of NBFI provided such company achieved NOF of Rs. 200 Lakh before April 1, 2017.
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9. Admittedly, the petitioner company has failed to achieve NOF of Rs. 200 Lakh before April 1, 2017. Therefore, the question arises as to whether respondent no.1-RBI could have cancelled the CoR after the petitioner company has informed the RBI on 04.04.2018 that it has achieved NOF of Rs. 200 Lakh. It is also not in dispute that RBI has also not granted any opportunity to the petitioner before passing the impugned order dated December 17, 2018 as provided under section 45-IA(6) pursuant to the show cause notice dated 09.07.2018.
10. The Appellate Authority has also not taken into consideration the submissions made on behalf of the petitioner company for not providing an opportunity and achieving NOF of Rs. 200 Lakh on 04.04.2018.
11. It appears that the Appellate Authority Page 22 of 27 Downloaded on : Sun Sep 17 21:52:59 IST 2023 NEUTRAL CITATION C/SCA/13433/2022 JUDGMENT DATED: 15/02/2023 undefined has also taken a contradictory stand in similar facts of other NBFC Companies on which reliance is placed by the petitioner.
12. In case of M/S Juhie (India) Pvt. Ltd. and in case of M/S Countwell Management services pvt. Ltd., though the said company failed to fulfill the statutory requirement of NOF of Rs. 200 Lakh before 01.04.2017, respondent authority reconsidered the matter and the CoR issued to the said companies was not canceled.
13. The submissions made on behalf of the RBI are with regard to the fact of notification issued by RBI having statutory force and non-applicability of provisions of section 45-IA(6)(ii) of the RBI Act, however, in the facts of the case, RBI cannot have a different approach for different NBFCs which has been successfully demonstrated by the Page 23 of 27 Downloaded on : Sun Sep 17 21:52:59 IST 2023 NEUTRAL CITATION C/SCA/13433/2022 JUDGMENT DATED: 15/02/2023 undefined petitioner as in case of M/S Juhie (India) Pvt. Ltd. and in case of M/S Countwell Management services pvt. Ltd., RBI has reconsidered its earlier decision by reviewing it and revoked the cancellation order of CoR.
14. As the petitioner has also achieved the requirement of NOF of Rs. 200 Lakh before the show cause notice was issued by RBI and as in similar facts, RBI has reconsidered and reviewed its own decision, the case of petitioner is also required to be reconsidered. It is apparent that the RBI has adopted a selective approach for reviewing its own order when the matter is remanded back by the Appellate Authority to RBI.
15. The petitioner is also therefore, entitled to the same treatment as is given by the Appellate Authority as well as by RBI in Page 24 of 27 Downloaded on : Sun Sep 17 21:52:59 IST 2023 NEUTRAL CITATION C/SCA/13433/2022 JUDGMENT DATED: 15/02/2023 undefined similar cases which are relied upon by the petitioner.
16. In facts of the case, therefore, when the petitioner has achieved NOF of Rs. 200 Lakh before issuance of show cause notice, as per proviso to section 45-IA(6) of the RBI Act, an opportunity ought to have been given to the petitioner. It is also pertinent to note that the petitioner is a closely held non-deposit taking, non-systematic NBFC and hence there was no question of prejudice to the public interest or interest of the depositors in the event there was delay in complying with the condition of the CoR of Rs.200 Lakh by the petitioner company. Therefore, there was no question of forming an opinion and thereby not giving the petitioner company an opportunity for taking necessary steps to comply with the requirement of achieving NOF of Rs. 200 Lakh. Page 25 of 27 Downloaded on : Sun Sep 17 21:52:59 IST 2023
NEUTRAL CITATION C/SCA/13433/2022 JUDGMENT DATED: 15/02/2023 undefined The Appellate Authority has utterly ignored the facts of the case of the petitioner by only observing that the petitioner has failed to achieve NOF of Rs. 200 Lakh as on 01.04.2017 and thereby mechanically rejected the appeal of the petitioner without considering submissions made by the petitioner.
17. Thus, the Appellate Authority has passed the impugned orders dated 17.12.2018 and 26.05.2020 without application of mind and therefore, such orders are liable to be quashed and set aside.
18. In view of the foregoing reasons, the impugned orders dated 17.12.2018 and 26.05.2020 are hereby quashed and set aside and the matter is remanded back to RBI to reconsider/review its decision cancelling the CoR of the petitioner company which is done Page 26 of 27 Downloaded on : Sun Sep 17 21:52:59 IST 2023 NEUTRAL CITATION C/SCA/13433/2022 JUDGMENT DATED: 15/02/2023 undefined by it in similarly situated case of M/S Juhie (India) Pvt. Ltd. and in case of M/S Countwell Management services pvt. Ltd. Such exercise shall be completed by RBI within a period of 12 weeks from the date of receipt of this order.
19. Rule is made absolute to the aforesaid extent. No order as to costs.
(BHARGAV D. KARIA, J) RAGHUNATH R NAIR Page 27 of 27 Downloaded on : Sun Sep 17 21:52:59 IST 2023