Gujarat High Court
Ionik Metallics & Ors vs Union Of India & Ors on 24 April, 2014
Author: Bhaskar Bhattacharya
Bench: Chief Justice, J.B.Pardiwala
C/SCA/14908/2013 ORDER
SCA149082012Cj11.doc
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
SPECIAL CIVIL APPLICATION NO. 14908 of 2012
With
SPECIAL CIVIL APPLICATION NO. 2970 of 2013
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SPECIAL CIVIL APPLICATION NO. 2085 of 2013
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CIVIL APPLICATION NO. 10584 of 2013
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SPECIAL CIVIL APPLICATION NO. 3304 of 2013
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SPECIAL CIVIL APPLICATION NO. 3305 of 2013
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SPECIAL CIVIL APPLICATION NO. 3513 of 2013
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SPECIAL CIVIL APPLICATION NO. 3728 of 2013
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SPECIAL CIVIL APPLICATION NO. 3749 of 2013
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SPECIAL CIVIL APPLICATION NO. 3916 of 2013
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SPECIAL CIVIL APPLICATION NO. 7053 of 2013
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SPECIAL CIVIL APPLICATION NO. 7055 of 2013
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SPECIAL CIVIL APPLICATION NO. 7058 of 2013
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SPECIAL CIVIL APPLICATION NO. 7059 of 2013
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SPECIAL CIVIL APPLICATION NO. 7060 of 2013
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SPECIAL CIVIL APPLICATION NO. 7104 of 2013
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SPECIAL CIVIL APPLICATION NO. 7308 of 2013
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SPECIAL CIVIL APPLICATION NO. 7524 of 2013
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SPECIAL CIVIL APPLICATION NO. 8041 of 2013
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SPECIAL CIVIL APPLICATION NO. 8302 of 2013
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SPECIAL CIVIL APPLICATION NO. 8880 of 2013
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SPECIAL CIVIL APPLICATION NO. 8920 of 2013
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SPECIAL CIVIL APPLICATION NO. 8949 of 2013
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SPECIAL CIVIL APPLICATION NO. 8950 of 2013
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SPECIAL CIVIL APPLICATION NO. 8956 of 2013
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SPECIAL CIVIL APPLICATION NO. 8957 of 2013
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SPECIAL CIVIL APPLICATION NO. 8958 of 2013
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SPECIAL CIVIL APPLICATION NO. 9578 of 2013
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SPECIAL CIVIL APPLICATION NO. 9579 of 2013
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SPECIAL CIVIL APPLICATION NO. 9628 of 2013
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SPECIAL CIVIL APPLICATION NO. 9637 of 2013
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SPECIAL CIVIL APPLICATION NO. 9952 of 2013
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SPECIAL CIVIL APPLICATION NO. 9953 of 2013
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SPECIAL CIVIL APPLICATION NO. 10004 of 2013
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SPECIAL CIVIL APPLICATION NO. 10005 of 2013
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SPECIAL CIVIL APPLICATION NO. 10081 of 2013
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SPECIAL CIVIL APPLICATION NO. 13843 of 2013
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SPECIAL CIVIL APPLICATION NO. 6804 of 2013
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SPECIAL CIVIL APPLICATION NO. 17595 of 2013
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SPECIAL CIVIL APPLICATION NO. 1770 of 2014
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SPECIAL CIVIL APPLICATION NO. 1690 of 2014
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SPECIAL CIVIL APPLICATION NO. 1674 of 2014
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SPECIAL CIVIL APPLICATION NO. 433 of 2014
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SPECIAL CIVIL APPLICATION NO. 18252 of 2013
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SPECIAL CIVIL APPLICATION NO. 18251 of 2013
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SPECIAL CIVIL APPLICATION NO. 18245 of 2013
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SPECIAL CIVIL APPLICATION NO. 17997 of 2013
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SPECIAL CIVIL APPLICATION NO. 17996 of 2013
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SPECIAL CIVIL APPLICATION NO. 17995 of 2013
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SPECIAL CIVIL APPLICATION NO. 17503 of 2013
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SPECIAL CIVIL APPLICATION NO. 17443 of 2013
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SPECIAL CIVIL APPLICATION NO. 17233 of 2013
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SPECIAL CIVIL APPLICATION NO. 15260 of 2013
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SPECIAL CIVIL APPLICATION NO. 15202 of 2013
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SPECIAL CIVIL APPLICATION NO. 14792 of 2013
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SPECIAL CIVIL APPLICATION NO. 14185 of 2013
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SPECIAL CIVIL APPLICATION NO. 13942 of 2013
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SPECIAL CIVIL APPLICATION NO. 13489 of 2013
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SPECIAL CIVIL APPLICATION NO. 13488 of 2013
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SPECIAL CIVIL APPLICATION NO. 13487 of 2013
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SPECIAL CIVIL APPLICATION NO. 10651 of 2013
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SPECIAL CIVIL APPLICATION NO. 10647 of 2013
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SPECIAL CIVIL APPLICATION NO. 10646 of 2013
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SPECIAL CIVIL APPLICATION NO. 10643 of 2013
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SPECIAL CIVIL APPLICATION NO. 10639 of 2013
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SPECIAL CIVIL APPLICATION NO. 10506 of 2013
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SPECIAL CIVIL APPLICATION NO. 10503 of 2013
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SPECIAL CIVIL APPLICATION NO. 10502 of 2013
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SPECIAL CIVIL APPLICATION NO. 10499 of 2013
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SPECIAL CIVIL APPLICATION NO. 10494 of 2013
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SPECIAL CIVIL APPLICATION NO. 10488 of 2013
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SPECIAL CIVIL APPLICATION NO. 10338 of 2013
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SPECIAL CIVIL APPLICATION NO. 10243 of 2013
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SPECIAL CIVIL APPLICATION NO. 10179 of 2013
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SPECIAL CIVIL APPLICATION NO. 10146 of 2013
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SPECIAL CIVIL APPLICATION NO. 10141 of 2013
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SPECIAL CIVIL APPLICATION NO. 10094 of 2013
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SPECIAL CIVIL APPLICATION NO. 10093 of 2013
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SPECIAL CIVIL APPLICATION NO. 9729 of 2013
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SPECIAL CIVIL APPLICATION NO. 9608 of 2013
FOR APPROVAL AND SIGNATURE:
HONOURABLE THE CHIEF JUSTICE Sd/-
MR. BHASKAR BHATTACHARYA
HONOURABLE MR.JUSTICE Sd/-
J.B.PARDIWALA
==========================================
=============== 1 Whether Reporters of Local Papers may be allowed Yes to see the judgment?
2 To be referred to the Reporter or not ? Yes 3 Whether their Lordships wish to see the fair copy No of the judgment?
4 Whether this case involves a substantial question Yes of law as to the interpretation of the constitution of India, 1950 or any order made there under?
5 Whether it is to be circulated to the civil judge? No ========================================== =============== IONIK METALLICS & ORS.
Versus UNION OF INDIA & ORS.
Page 4 of 75 C/SCA/14908/2013 ORDER Appearance for the petitioners:
MR VISHWAS K SHAH with MR MASOOM K SHAH, ADVOCATE for the Petitioners in SCA No.14908/13, 2970/13, 3304/13, 3305/13, 3513/13, 3728/13, 3749/13, 3916/13, 7055/13, 7058/13, 7059/13, 7060/13, 7104/13, 7308/13, 8041/13, 8303/13, 8880/13, 8920/13, 9952/13, 9953/13, 10081/13, 13843/13, 6804/13, 17595/13, 9729/13, 10141/13, 10179/13, 10646/13, 13942/13, 18245/13, 1674/14 and 1690/14.
MR SACHIN D VASAVADA for the petitioners in SCA NO.7053/13. MR ISHAR MIHIR PATEL for the petitioners in SCA No.7524/13. MR SS PANESAR for the petitioners in SCA No. 8949/13, 8950/13, 9628/13, 9637/13, 10146/13, 10338/13, 10488/13, 10639/13, and 17443/13.
MR MAHESH BHAVSAR for the petitioners in SCA No. 2085/13 and CA No. 10584/13.
MR MP SHAH with MS. KRUTI SHAH for the petitioners in SCA No. SCA No. 8956/13, 8957/13, and 8958/13.
MR SP MAJMUDAR with MR PP MAJMUDAR with MR SHAKTI S JADEJA in SCA No. 9578/13, 9579/13, 10004/13, 10005/13, 10093/13, 10094/13, 10243/13, 10494/13, 10499/13, 10502/13, 10503/13, 10506/13, 10643/13, 10647/13, 10651/13, 13487/13, 13488/13, 13489/13, 14185/13, 14792/13, 15202/13, 15260/13, 17503/13, 17995/13, 17996/13, 17997/13, 18251/13, and 18252/13. MR KANDRAP J TRIVEDI in SCA No. 9608/13.
MR RAVINDRA SHAH with MRS KNAN R SHAH for the petitioners in SCA No. 17233/13.
MR DIGANT B KAKKAD for the petitioner in SCA No. 433/14. MR URVEST K GOR for the petitioner in SCA No. 1770/14.
Appearance for the respondents:-
MR S N SOPARKAR, SR. ADVOCATE with AMAR N BHATT, ADVOCATE for the Respondent-Reserve Bank of India.
MR IH SYED, ASST. SOLICITOR GENERAL for the Union of India in all matters.
MS NALINI S LODHA, MR ABHIJIT P JOSHI, MR INDRAVADAN PARMAR, MR NITIN K MEHTA, MR BHARAT JANI, MR ABHISHEK M MEHTA, MR RJ TRIVEDI with MR JT TRIVEDI with MS JIGNASA B TRIVEDI, MR DHARMESH V VYAS, MR. LALIT M PATEL, MR PUNIT B JUNEJA, MR K M PARIKH, MR NAGESH SOOD, MR YH MOTIRAMANI with MR BIJU A NAIR, MRS VD NANAVATI, M/S WADIAGHANDY & CO., MR PRANAV G DESAI, MR ANIP GANDHI, MR. YH MOTIRAMANI, MR SH ALMAULA, MR HARDIK S SONI, MR LALIT M PATEL, MR ANIP A GANDHI, MR VIRENDRA M GOHIL, and MS MAUNA BHATT for the Respondents in respective matters.
========================================== Page 5 of 75 C/SCA/14908/2013 ORDER =============== CORAM: HONOURABLE THE CHIEF JUSTICE MR. BHASKAR BHATTACHARYA and HONOURABLE MR.JUSTICE J.B.PARDIWALA Date : 24/04/2014 COMMON CAV JUDGMENT (PER : HONOURABLE THE CHIEF JUSTICE MR. BHASKAR BHATTACHARYA)
1. All these Special Civil Applications were heard analogously as in all these matters, the questions that had arisen for consideration were whether the provisions contained in section 2 (1)(o) of the Securitisation And Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002 [hereinafter referred to as the Securitisation Act or SARFAESI Act] and clause 2.1 of the guidelines issued by the Reserve Bank of India known as Prudential Norms on Income Recognition, Asset Classification and Provisioning - pertaining to Advances are ultra vires the Constitution of India, and, consequently, the actions taken by various Banks concerned under the Securitisation Act are illegal and without authority of law.
2. We, however, propose to treat the Special Civil Application No. 14908 of 2012 as the lead matter.
3. The case made out by the petitioners in SCA No. 14908 of 2012 may be summed up thus:Page 6 of 75 C/SCA/14908/2013 ORDER
[a]. The petitioners are the borrowers and/or guarantors of Punjab National Bank, which is the respondent No.2 in this writ-petition, whose account with the respondent-Bank had allegedly become Non Performing Assets [NPA, for short hereafter] according to the respondent No.2. The respondent No.1 is the Union of India and it has been made party as the petitioners wanted to challenge the law enacted by the Parliament as invalid. Similarly, the Reserve Bank of India has also been made party as the guidelines of the Reserve Bank indicated above have been challenged. We, consequently, also issued notice to the learned Attorney General of India pursuant to which Mr. I. H. Syed, the learned Assistant Solicitor General of India, has appeared.
[b]. According to the petitioners, their account had not become NPA although the respondent No.2-Bank had alleged in the Demand Notice that their accounts had become NPA on 30th June 2012 in accordance with the aforesaid RBI Guidelines. The petitioners contend that the notice under section 13 (2) of the Securitisation Act is vague and ambiguous one inasmuch as there is no explanation as to how the petitioners' account had become NPA. The petitioners further contend that the Bank cannot, of its own will and fancy, declare the accounts of the petitioners as NPA and it has to show the cogent reasons and explanation and indicate how the account had become NPA from a performing one.Page 7 of 75 C/SCA/14908/2013 ORDER
[c]. The petitioners have further submitted that the amended definition of section 2 (1) (o) of the Securitisation Act, which defines NPA, should be declared as ultra vires the Constitution of India. The petitioners have further prayed that the clause 2.1 of the Prudential Norms on Income Recognition, Asset Classification and Provisioning -
pertaining to Advances, issued by the Reserve Bank of India, should also be declared as ultra vires.
[d]. All the respondents, including various respondent-Banks and the Union of India have opposed this writ application by filing separate affidavits in which the respondents have submitted that this writ-application should not be entertained on the ground of lack of bona fide of the petitioners, and, at the same time, the provisions contained in section 2(1) (o) of the Securitisation Act and the guidelines of the RBI challenged herein are quite in conformity with the provisions of the Constitution of India. According to the respondents, the sole object of the petitioners is to delay the execution of the sale of the secured assets although the petitioners have not paid the dues of the concerned Bank. The respondents, therefore, pray for dismissal of the writ-application.
4. Facts and the contentions in the remaining 78 writ-applications are also more or less similar.Page 8 of 75 C/SCA/14908/2013 ORDER
5. The Union of India has opposed these writ-applications by filing an affidavit [in Special Civil Application No. 2970 of 2013], which has been adopted in all these matters, and their objections may be summed up thus:
[A]. SARFAESI Act was enacted and passed by both the Houses of the Parliament of India in the year 2002 and got the assent of the President on 17th December 2002, and came into force with effect from 21st June 2002.
[B]. SARFAESI Act was enacted to enable the Banks and Financial Institutions to realize long term assets, manage problems of liquidity, assets-liability mismatch and improve recovery by exercising powers to take possession of security and sell such security and thus, to reduce the NPA by adopting measures for recovery or reconstruction.
[C]. The constitutional validity of SARFAESI Act was finally decided and all the controversies were settled by the Supreme Court of India in various Writ Petitions including that of Mardia Chemicals Ltd. v/s Union of India reported in (2004) 4 SCC 311. Hence, the contention of the petitioners that section 2(1) (o) of the SARFAESI Act is unconstitutional is not tenable.
[D]. The provisions of section 2(1) (o) of the SARFAESI Act was amended by Act No. 30 of 2004 and the earlier provisions containing Page 9 of 75 C/SCA/14908/2013 ORDER the phrase "doubtful or loss asset, in accordance with the directions or under guidelines relating to asset classification issued by the Reserve Bank" has been substituted by:
"doubtful or loss asset,-
(a). in case such bank or financial institution is administered or regulated by any authority or body established, constituted or appointed by any law for the time being in force, in accordance with the directions or guidelines relating to assets classifications issued by such authority or body;
[b]. in any other case, in accordance with the directions or guidelines relating to assets classifications issued by the Reserve Bank."
[E]. The amendment in section 2(1)(o) of the SARFAESI Act was made in the year 2004 to extend the classification norms of NPA stipulated by the concerned regulator who is administering or regulating such entity or the RBI when the said institution is not regulated by any regulator in India. There are financial institutions such as Housing Finance Corporations notified by Central Government under the SARFAESI Act, which are regulated by National Housing Bank. The NPA of these institutions are classified as per guidelines prescribed by National Housing Bank. The Act covers certain other institutions such as Asian Development Bank not regulated by any regulator in India, in whose case their NPA are classified as per the guidelines prescribed by RBI. The above amendments in the Act were Page 10 of 75 C/SCA/14908/2013 ORDER made so that the guidelines issued by the concerned regulator as applicable to them are covered for the purpose of recovery under the SARFAESI Act.
[F]. The amendment covered the entities under the SARFAESI Act regulated by different regulators such as Reserve Bank of India, National Housing Bank etc. who had stipulated their own guidelines for the purpose. At the same time, the amendment also covered the entities like Asian Development Bank, which did not fall within the purview of any regulator in India. Therefore, the amendment was made in the Act to take care of these situations and these amendments were necessary to cover the deficiencies noticed in the Act, and the amendments do not violate Article 14 of the Constitution of India.
6. The stance taken by the Reserve Bank of India may be summed up thus:
[i]. The guidelines issued by the RBI are neither discriminatory nor arbitrary. RBI is the regulatory authority of various financial entities viz., commercial banks, financial institutions, urban co-operative banks, non-banking finance companies, primary dealers, and, payment system providers etc. While there could be some similarities between these entities, the nature and function of these entities are different from each other, and therefore, it may not be possible or Page 11 of 75 C/SCA/14908/2013 ORDER desirable to have a uniform set of norms for all financial entities on an immediate basis. The 90 days delinquency norm for banks is an internationally accepted norm and is essential to identify impairment of financial assets in order to provide for it. RBI norms for asset classification are evolved over a period and the 90 days delinquency norms were brought in through a calibrated manner as part of the efforts to benchmark the RBI prudential regulations to the international standards. The Narasimham Committee's recommendations made in 1991 regarding income recognition, asset classification and provisioning were examined by the RBI and it was decided to implement them in a phased manner over a period of three years commencing with the accounting year beginning 1 April, 1992, vide circular DBOD No. BC.129/21.04.043/92 dated April 27, 1992 on 'Income Recognition, Asset Classification, Provisioning and Other Related Matters. In terms of the said circular, for the year ending 31 March 1993, a term loan will be treated as NPA if the interest remains past due for a period of four quarters as on that date. For the year ending 31 March, 1994 and 31 March, 1995 and onwards, a loan will be treated as NPA if the interest remains past due for three quarters and two quarters respectively. Subsequently, in order to align the RBI's prudential norms with the international benchmarks, RBI had stipulated vide circular DBOD No. BP.BC.116 / 21.04.048 / 2000-2001 dated 2nd May, 2001 that with effect from March 31, 2004, a NPA shall be a loan or an advance interest and / or installment of principal remain overdue for a period of more than 90 Page 12 of 75 C/SCA/14908/2013 ORDER days in respect of a term loan. Comparison of Gross NPAs of banks with NBFCs is totally unfair. The asset mix of commercial banks varies quite widely from that of NBFCs. While banks have to mandatorily lend to agriculture, NBFCs have no such mandatory requirement.
Further, banks also have relatively large exposures to industrial and infrastructure houses. Hence, the Gross NPAs of banks are not comparable with that of NBFCs in any manner.
[ii]. The 'Working Group on the Issues and Concerns in the NBFC Sector' (Usha Thorat Committee), was formed to study the issues and concerns in the NBFC sector. The terms of reference of the Committee included review of:
(i). Entry point norms (ii). Concept of 'principal business' for registration of NBFCs
(iii). Multiple NBFCs within the same business group
(iv). Disclosure norms for NBFCs
(v). Principles for frequency and depth of supervision, and,
(vi). Examine the need for convergence of regulations of NBFCs with that of best regulatory practice of banks, etc. [iii]. The focus of the Committee was on the issues related to NBFCs. The Usha Thorat Committee, in its report, while appreciating the differences between banks and NBFCS, has opined that:-
"6.1.6 While there are forceful arguments for regulatory convergence, there are equally forceful views against it. In this alternative perspective, NBFCs and banks are not viewed as Page 13 of 75 C/SCA/14908/2013 ORDER similar to each other, but rather as complementary entities. NBFCs serve niche areas and are more flexible and borrower friendly. In many cases, particularly in the rural and semi-urban areas, they have contributed to last mile connectivity and offered products which banks have not been able to. They have served the needs of clients in the SME sector and in the transport industry where banks have been hesitant to cater to. The NBFCs have also provided funding for equipment purchase, second hand truck purchases, various types of mergers and acquisitions, infrastructure and real estate projects that add productive capacity in the economy. Thus NBFCs play a valuable economic role which must be supported through an appropriately designed regulatory framework. It is argued by some that the absence of regulatory diversity may lead to convergence of business conduct which results in amplifying systemic instability, especially during periods of stress. A range of regulatory regimes could in fact encourage market participants to pursue a variety of business strategies within the financial sector such that the sector may be more resilient to contagion from systemic financial stress.
6.1.7. In view of the above the Working Group has consciously refrained from pursuing the option of bringing in exact bank like policies for NBFCs such as limits on capital market exposures, real estate lending, priority sector lending, CRR, SLR and so on. The Working Group is of the view that the policy and regulatory arbitrage between banks and NBFCs would be best addressed through the calibrated use of prudential measures such as, higher capital (already part of regulation) higher risk weights for sensitive sectors like real estate and Page 14 of 75 C/SCA/14908/2013 ORDER capital markets, and liquidity ratio for NBFCs. In addition it was felt that the rapidly evolving NBFC sector could benefit from the introduction of some of the best practices of banks in the areas of governance, compensation, accounting and disclosure norms (including off balance sheet exposures). In making its recommendations the Working Group is mindful, that the aggregate assets of NBFCs are only 10 per cent of that of the banking sector."
[iv]. With regard to asset classification and provisioning norms, the working group recommended that: -
"6.2 (v) The asset classification and provisioning norms (including standard asset provisioning norms) should, in a phased manner, be made similar to that of banks for all registered NBFCs irrespective of size;"
[v]. Thus, the working group has actually recommended that the asset classification norms for NBFCs be brought in line with that of banks and not vice versa.
[vi]. The draft guidelines dated 12th December 2012 on 'Review of NBFC Regulatory Framework - Recommendations of the Working Group on Issues and Concerns in the NBFC Sector - Prudential Regulations' has inter alia stated that :
Page 15 of 75 C/SCA/14908/2013 ORDER
"3.1 At present, the period for classifying loans into NPAs in case of NBFCs is higher at 180/360 days compared to 90 days for banks. It has been decided that the asset classification and provisioning norms (including standard asset provisioning norms) should, in a phased manner, be made similar to that of banks for all registered NBFCs irrespective of size. The same will be implemented in phases, viz; a 120 day norm shall be applied from April 01, 2014 to March 31, 2015 and a 90 day norm thereafter. A onetime adjustment of the repayment schedule which shall not amount to restructuring will, however, be permitted."
[vii]. Thus, the asset classification norms for NBFCs are proposed to be brought in line with that of banks. 90 days delinquency norm is essential to identify impairment of financial assets in order to provide for it. RBI norms for asset classification for banks have been evolved over a period, and the 90 days delinquency norms were brought in through a calibrated manner in the efforts to benchmark the RBI prudential regulations to the international standards. These prudential norms are one of the building blocks for financial soundness of Indian banks and any deviation would render the entire banking system weaker. Further, any delay in recognition of deterioration in asset quality removes pressure on the banks to deal promptly with the problem. Commercial banks hold the major share of banking system's assets (approx. 76 %) and it is imperative that they are subjected to the best practices to maintain the stability of the Page 16 of 75 C/SCA/14908/2013 ORDER system. This apart, the prudential norms fall within the domain of policy making of RBI and the Court may not interfere with the same.
7. Mr. Shah, the learned advocate appearing on behalf of the petitioners, has made twofold submissions before this Court. First, according to him, section 2(1)(o) of the Securitisation Act is ultra vires the Constitution of India being violative of Article 14 of the Constitution and is also ultra vires the principal original Act. Mr. Shah also submits that the amended section 2(1) (o) of the Securitisation Act is also vague and ambiguous. The principal grievance of Mr. Shah is that paragraph 2.1 of the RBI Guidelines is discriminatory, arbitrary, unreasonable and ultra vires the Securitisation Act. According to Mr. Shah, there is no intelligible differentia for having different and distinct period of NPA in prudential norms for Banks on one hand and other institutions on the other which are governed by the same regulator, Reserve Bank of India, especially in light of Delhi High Court's decision reported in AIR 2014 DEL 60 wherein it is observed that two different regulators can have different guidelines which implies that the same regulator must have same set of guidelines for all it's entities. Mr. Shah further submits that in the light of Usha Thorat Committee report, the discrimination engrafted in the Reserve Bank of India's guidelines for banks on one hand and NBFCs and Securitisation Companies on the other show that the guidelines of RBI are unjustified. Mr. Shah further contends that neither the Union of India nor the Reserve Bank of India nor the respective banks have Page 17 of 75 C/SCA/14908/2013 ORDER placed any materials on record to justify the discrimination which exists for different period of NPA for Banks on one hand and other institutions on the other. Mr. Shah further contends that the RBI has permitted different sets of guidelines for Banks, NBFCs and Securitisation Companies which violates Article 14 of the Constitution of India. Mr. Shah, therefore, prays for declaring section 2(1)(o) of the Securitisation Act as ultra vires the Constitution of India and also prays for setting aside the guidelines issued by the Reserve Bank of India.
8. Mr. Syed, the learned Assistant Solicitor General of India, has, on the other hand, opposed the aforesaid contentions of Mr. Shah and has contended that it would appear from the "Statement of Object and Reasons" for introduction of the Securitisation Act respecthat the same was for empowering banks and financial institutions to take possession of securities given for financial assistance and sell or lease the same or take over management in the event of default, i.e. classification of the borrower's account as NPA in accordance with the directions given or under guidelines issued by the Reserve Bank of India from time to time. By referring to clause (l), Mr. Syed submitted that the further object of the Act was to extend the application of the proposed legislation initially to banks and financial institutions and for empowerment of the Central Government to extend the application of the proposed legislation to NBFCs and other entities. Mr. Syed, therefore, submits that gradually, the other NBFCs and other entities Page 18 of 75 C/SCA/14908/2013 ORDER are brought within the purview of the Securitisation Act by various other statutory provisions. Although those NBFCs and other entities are regulated by different authorities, it was the desire of the Parliament that section 2(1) (o) of the Securitisation Act also be necessarily amended enabling those regulators to make guidelines for NPA in accordance with the provisions of the Statute which created those entities. Mr. Syed submits that different regulators having been created for guiding those NBFCs and other entities, it not desirable to involve RBI in the matter of fixation of NPA in respect of those entities, as a result, clause (a) to section 2(1) (o) of the Securitisation Act has been created. Mr. Syed submits that the aforesaid amendment passes the test of Article 14 of the Constitution of India.
9. Mr. Soparkar, the learned Senior Advocate, appearing on behalf of the RBI has supported Mr. Syed, the learned Assistant Solicitor General of India, and, at the same time, has contended that clause 2.1 of the RBI's guidelines is quite in conformity with the Constitution of India. According to Mr. Soparkar, the attempt on the part of the petitioners to compare Banks with NBFCs is unfair and not tenable as the asset mix of Banks varies quite widely from that of NBFCs. Mr. Soparkar further contends that while Banks have to mandatorily lend for the purpose of agriculture, NBFCs have no such mandatory requirement. He further submits that Banks also have relatively large exposure to industrial and infrastructure houses, and hence, the gross Page 19 of 75 C/SCA/14908/2013 ORDER NPAs of Banks are generally not comparable with that of NBFCs in any manner. Mr. Soparkar further contends that the reliance of the petitioners on the Usha Thorat Committee report is misplaced in as much as the said Committee was formed to examine the issues and concerns in the NBFC Sector. Besides, according to Mr. Soparkar, the Committee in its report has appreciated the differences between Banks and NBFCs in paragraphs 6.1.6 and 6.1.7 of the said Report [which we have reproduced in the earlier part of this judgment]. Mr. Soparkar further contends that even as per the Usha Thorat Committee Report, which is under consideration of the RBI, it has been recommended that the Asset Classification norms for NBFCs be brought in line with that of the Banks, i.e. it should be brought down to 90 days, and not vice-versa. Mr. Soparkar further submits that the Petitioners in this group of matters are borrowers of different Banks, and not of NBFCs, and they cannot, therefore, insist that the period for classification of their account as NPA should be 180 days and not 90 days. Mr. Soparkar further points out that the recommendations are merely suggestions, which may or may not be accepted by the RBI.
9.1 Mr. Soparkar further contends that the prudential norms policy being an economic policy matter, would fall within the domain of the policy making by RBI and, therefore, the guidelines should not be struck down by this Court in exercise of its powers under Article 226 of the Constitution of India. In support of this contention, Mr. Soparkar Page 20 of 75 C/SCA/14908/2013 ORDER relied on the decision of the Supreme Court in the case of MANOHAR LAL SHARMA VS. UNION OF INDIA reported in (2013) 6 SCC 616. He also relied upon the judgment of the Supreme Court in the case of VILLIANUR IYARKKAI PADUKAPPU MAIYAM vs. UNION OF INDIA reported in (2009) 7 SCC 561 with respect to the policy decision and economic issues at paragraphs 167 and 169 of the judgment. 9.2 Mr. Soparkar, therefore, prays for dismissal of the writ- applications.
10. Other learned advocates appearing on behalf of various Banks have opposed the above contentions of Mr. Shah and supported the contentions or Mr. Syed and Mr. Soparkar.
11. In order to appreciate the contentions of the petitioners in these writ-applications, it will be profitable to refer to:-
[i]. the objects and reasons of the Securitisation Act;
[ii]. Original section 2(1) (o) of the Securitisation Act as it stood prior to the amendment of the year 2004;
[iii]. the amended section 2(1) (o) of the Securitisation Act ;
]iv]. Section 2(1) (f) of the Securitisation Act ;
[v]. Section 2(1) (ha) of the Securitisation Act ;
[vi]. Section 2(1) (j) of the Securitisation Act ;
[vii]. Section 2(1) (m) of the Securitisation Act , and, Page 21 of 75 C/SCA/14908/2013 ORDER [viii]. Sub-clauses 2.1 to 2.3 of clause 2 of the guidelines issued by the Reserve Bank of India known as Prudential Norms on Income Recognition, Asset Classification and Provisioning -
pertaining to Advances, which are quoted below:-
"STATEMENT OF OBJECTS AND REASONS The financial sector has been one of the key drivers in India's efforts to achieve success in rapidly developing its economy. While the banking industry in India is progressively complying with the international prudential norms and accounting practices, there are certain areas in which the banking and financial sector do not have a level playing field as compared to other participants in the financial markets in the world. There is no legal provision for facilitating securitisation of financial assets of banks and financial institutions. Further, unlike international banks, the banks and financial institutions in India do not have power to take possession of securities and sell them. Our existing legal framework relating to commercial transactions has not kept pace with the changing commercial practices and financial sector reforms. This has resulted in slow pace of recovery of defaulting loans and mounting levels of non-performing assets of banks and financial institutions. Narasimham Committee I and II and Andhyarujina Committee constituted by the Central Government for the purpose of examining banking sector reforms have considered the need for changes in the legal system in respect of these areas. These Committees, inter alia, have suggested enactment of a new legislation for securitisation and empowering banks and financial institutions to take possession of the securities and to sell them without the intervention of the court. Acting on these suggestions, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance, Page 22 of 75 C/SCA/14908/2013 ORDER 2002 was promulgated on the 21st June, 2002 to regulate securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto. The provisions of the Ordinance would enable banks and financial institutions to realise long-term assets, manage problem of liquidity, asset liability mismatches and improve recovery by exercising powers to take possession of securities, sell them and reduce non-performing assets by adopting measures for recovery or reconstruction.
2. It is now proposed to replace the Ordinance by a Bill, which, inter alia, contains provisions of the Ordinance to provide for--
[a] registration and regulation of securitisation companies or reconstruction companies by the Reserve Bank of India; [b] facilitating securitisation of financial assets of banks and financial institutions with or without the benefit of underlying securities;
[c] facilitating easy transferability of financial assets by the securitisation company or reconstruction company to acquire financial assets of banks and financial institutions by issue of debentures or bonds or any other security in the nature of a debenture;
[d] empowering securitisation companies' or reconstruction companies to raise funds by issue of security receipts to qualified institutional buyers;
[e] facilitating reconstruction of financial assets acquired by exercising powers of enforcement of securities or change of management or other powers which are proposed to be conferred on the banks and financial institutions; [f] declaration of any securitisation company or reconstruction company registered with the Reserve Bank of India as a public financial institution for the purpose of section Page 23 of 75 C/SCA/14908/2013 ORDER 4A of the Companies Act, 1956;
[g] defining 'security interest' as any type of security including mortgage and change on immovable properties given for due repayment of any financial assistance given by any bank or financial institution;
[h] empowering banks and financial institutions to take possession of securities given for financial assistance and sell or lease the same or take over management in the event of default, i.e. classification of the borrower's account as non-performing asset in accordance with the directions given or under guidelines issued by the Reserve Bank of India from time to time;
[i] the rights of a secured creditor to be exercised by one or more of its officers authorised in this behalf in accordance with the rules made by the Central Government;
[j] an appeal against the action of any bank or financial institution to the concerned Debts Recovery Tribunal and a second appeal to the Appellate Debts Recovery Tribunal; [k] setting up or causing to be set up a Central Registry by the Central Government for the purpose of registration of transactions relating to securitisation, asset reconstruction and creation of security interest;
[l] application of the proposed legislation initially to banks and financial institutions and empowerment of the Central Government to extend the application of the proposed legislation to non-banking financial companies and other entities;
[m] non-application of the proposed legislation to security interests in agricultural lands, loans not exceeding rupees one lakh and cases where eighty per cent of the loans are repaid by the borrower.Page 24 of 75 C/SCA/14908/2013 ORDER
2. The Bill seeks to achieve the above objects.
xxx xxx xxx Original section 2(1)(o) of Securitisation Act.
"Non-performing asset" means:
An asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or under guidelines relating to assets classifications issued by the Reserve Bank.
Amended Section 2[1][o] of the Securitisation Act.
"Non-performing asset" means:
An asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, --
[a] in case such bank or financial institution is administered or regulated by any authority or body established, constituted or appointed by any law for the time being in force, in accordance with the directions or guidelines relating to assets classifications issued by such authority or body;
[b] in any other case, in accordance with the directions or guidelines relating to assets classifications issued by the Reserve Bank;
xxx xxx xxx
2[1] [f]. "borrower" means any person who has been
granted financial assistance by any bank or financial institution or who has given any guarantee or created any mortgage or Page 25 of 75 C/SCA/14908/2013 ORDER pledge as security for the financial assistance granted by any bank or financial institution and includes a person who becomes borrower of a securitisation company or reconstruction company consequent upon acquisition by it of any rights or interest of any bank or financial institution in relation to such financial assistance;
xxx xxx xxx 2[1][ha] "debt" shall have the meaning assigned to it in
clause [g] of section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993;
xxx xxx xxx 2[1][j].- "default" means non-payment of any principal
debt or interest thereon or any other amount payable by a borrower to any secured creditor consequent upon which the account of such borrower is classified as non-performing asset in the books of account of the secured creditor;
xxx xxx xxx 2[1][m] "financial institution" means--
[i] a public financial institution within the meaning of section 4A of the Companies Act, 1956;
[ii] any institution specified by the Central Government under sub-clause [ii] of clause [h] of section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993; [iii] the International Finance Corporation established under the International Finance Corporation [Status, Immunities and Privileges] Act, 1958;
[iv] any other institution or non-banking financial company as defined in clause [f] of section 45-I of the Reserve Bank of India Act, 1934, which the Central Government may, by notification, Page 26 of 75 C/SCA/14908/2013 ORDER specify as financial institution for the purposes of this Act;
Sub-clauses 2.1 to 2.3 of clause 2 of the guidelines issued by the Reserve Bank of India known as Prudential Norms on Income Recognition, Asset Classification and Provisioning - pertaining to Advances:
2. DEFINITIONS 2.1 Non-performing assets 2.1.1 An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A 'non-performing asset' (NPA) was defined as a credit facility in respect of which the interest and/or instalment of principal has remained 'past due' for a specified period of time. The specified period was reduced in a phased manner as under:
Year ending March 31 Specified
period
1993 four quarters
1994 three quarters
1995 onwards two quarters
2.1.2 An amount due under any credit facility is
treated as "past due" when it has not been paid within 30 days from the due date. Due to the improvements in the payment and settlement systems, recovery climate, upgradation of technology in the banking system, etc., it was decided to dispense with 'past due' concept, with effect from March 31, 2001. Accordingly, as from that date, a Non- performing Asset (NPA) shall be an advance where
i) interest and/or instalment of principal remain overdue for Page 27 of 75 C/SCA/14908/2013 ORDER a period of more than 180 days in respect of a Term Loan,
ii) the account remains 'out of order' for a period of more than 180 days, in respect of an Overdraft/Cash Credit (OD/CC),
iii) the bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted,
iv) interest and/or instalment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and
v) any amount to be received remains overdue for a period of more than 180 days in respect of other accounts.
2.1.3 With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the '90 days' overdue' norm for identification of NPAs, for the year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non- performing asset (NPA) shall be a loan or an advance where;
i) interest and/or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan,
ii) the account remains 'out of order' for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC),
iii) the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
iv) interest and/or instalment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and
v) any amount to be received remains overdue for a period of more than 90 days in respect of other accounts. 2.2 'Out of Order' status Page 28 of 75 C/SCA/14908/2013 ORDER An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for six months as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as 'out of order'.
2.3 'Overdue' Any amount due to the bank under any credit facility is 'overdue' if it is not paid on the due date fixed by the bank.
12. Before we deal with the aforesaid contentions of the learned counsel appearing for the respective parties, we should bear in mind that a three-judge-bench of the Supreme Court in the case of MARDIA CHEMICALS LTD. v. UNION OF INDIA reported in AIR 2004 SC 2371 had an occasion to deal with the legality and constitutional validity of the Securitisation Act as it stood prior to the amendment challenged in these applications. Ultimately, the Supreme Court, in paragraph 82 of the judgment held as follows:
"We, therefore, subject to what is provided in paragraph 80 above, uphold the validity of the Act and its provisions except that of sub-section (2) of Section 17 of the Act, which is declared ultra vires of Article 14 of the Constitution of India."Page 29 of 75 C/SCA/14908/2013 ORDER
12.1 Thus, except the provisions contained in sub-section 2 of section 17 of the Securitisation Act, all other provisions of the Act as those then stood were declared to be intra vires. In a subsequent decision of the Supreme Court in the case of United Bank of India vs. Satyawati Tandon and others reported in (2010) 8 SCC 110 in paragraph 27, it has been reiterated that except the provision of Section 17(2), all other provisions of the Securitisation Act are intra vires as held in the case of Mardia Chemicals (supra),
13. Mr. Shah, in this connection, strenuously contended before us that in the aforesaid decision of the Supreme Court in the case of Mardia Chemicals [supra], the Supreme Court had no occasion to deal with the question of validity of section 2(1)(o) of the Securitisation Act, and, at the same time, even if it is assumed that the Supreme Court dealt with such provisions, the amended provisions of section 2(1)(o) of the Securitisation Act having come into force after the passing of the judgment in the case of Mardia Chemicals [supra], we should not be influenced by the said judgment of the Supreme Court as the Supreme Court had no occasion to consider the amended provisions of section 2(1)(o) of the Securitisation Act or paragraph 2.1 of the RBI guidelines which was not the subject matter of challenge in that case.
14. We fully accept the contention of Mr. Shah that the Supreme Page 30 of 75 C/SCA/14908/2013 ORDER Court had no occasion to consider the legality or constitutional validity of the amended section 2(1) (o) of the Securitisation Act, as it is amended after the decision of the Supreme Court in the case of Mardia Chemicals [supra], but we are unable to accept his contention that paragraph 2.1 of the RBI Guidelines is also open to challenge before this Court after the decision of the Supreme Court in the case of Mardia Chemicals [supra]. It appears from paragraph 37 of the judgment in the case of Mardia Chemicals [supra] that the Supreme Court specifically took into consideration the RBI guidelines contained in paragraph 2.1, and ultimately, came to the following conclusion [at page 2387]:-
"37. .... .... .... From what is quoted above, it is quite evident that guidelines as laid down by the Reserve Bank of India which are in more details but not necessary to be reproduced here, laying down the terms and conditions and circumstances in which the debt is to be classified as non- performing asset, as early as possible. Therefore, we find no substance in the submission made on behalf of the petitioners that there are no guidelines for treating the debt as a non- performing asset."
15. It is now settled law that once, on consideration of the provisions contained in a statute, the apex Court has arrived at a finding that those are not ultra vires either the Constitution of India or any other statute, it is not open for the High Court in a subsequent petition to entertain a plea that a particular point relating to the Page 31 of 75 C/SCA/14908/2013 ORDER selfsame provision was not considered by the Supreme Court or a specific point was not raised therein. In other words, in a subsequent petition before the High Court, a High Court cannot come to a contrary conclusion merely on the ground that in the previous matter before the Supreme Court, the matter was not properly argued by the learned counsel for the parties or attention of the Supreme Court was not drawn to a particular defect. In this connection, we may profitably refer to the following observations in the three-judge-bench decision of the Supreme Court in the case of Director of Settlement, A.P vs. M. R. Apparao reported in AIR 2002 SC 1598 while elaborating the binding nature of the judgment of the Supreme Court:
"So far as the first question is concerned, Article 141 of the Constitution unequivocally indicates that the law declared by the Supreme Court shall be binding on all Courts within the territory of India. The aforesaid Article empowers the Supreme Court to declare the law. It is, therefore, an essential function of the Court to interpret a legislation. The statements of the Court on matters other than law like facts may have no binding force as the facts of two cases may not be similar. But what is binding is the ratio of the decision and not any finding of facts. It is the principle found out upon a reading of a judgment as a whole, in the light of the questions before the Court that forms the ratio and not any particular word or sentence. To determine whether a decision has 'declared law' it cannot be said to be a law when a point is disposed of on concession and what is binding is the principle underlying a decision. A judgment of the Court has to be read in the context of questions which arose for consideration in the case in which the judgment was delivered.Page 32 of 75 C/SCA/14908/2013 ORDER
An 'obiter dictum' as distinguished from a ratio decidendi is an observation by Court on a legal question suggested in a case before it but not arising in such manner as to require a decision. Such an obiter may not have a binding precedent as the observation was unnecessary for the decision pronounced, but even though an obiter may not have a bind effect as a precedent, but it cannot be denied that it is of considerable weight. The law which will be binding under Article 141 would, therefore, extend to all observations of points raised and decided by the Court in a given case. So far as constitutional matters are concerned, it is a practice of the Court not to make any pronouncement on points not directly raised for its decision. The decision in a judgment of the Supreme Court cannot be assailed on the ground that certain aspects were not considered or the relevant provisions were not brought to the notice of the Court (See AIR 1970 SC 1002 and AIR 1973 SC 794(sic)). When Supreme Court decides a principle it would be the duty of the High Court or a subordinate Court to follow the decision of the Supreme Court. A judgment of the High Court which refuses to follow the decision and directions of the Supreme Court or seeks to revive a decision of the High Court which had been set aside by the Supreme Court is a nullity. (See 1984 (2) SCC 402 and 1984 (2) SCC 324). We have to answer the first question bearing in mind the aforesaid guiding principles."
16. In the case of Ballabhdas Mathurdas Lakhani vs. Municipal Committee Malkapur reported in AIR 1970 SC 1002, another three-judge-decision, the Supreme Court made the following observations when a party wanted to avoid a decision of the Supreme Court on the ground that all the relevant provisions of law was not Page 33 of 75 C/SCA/14908/2013 ORDER placed before the Supreme Court:
"The first question is concluded by the judgment of this Court in Bharat Kala Bhandar's case, 1965-3 SCR 499 = (AIR 1966 SC 249). That case arose under the C. P. and Berar Municipalities Act, 1922. The right of a Municipality governed by that Act to levy under Section 66 (1) (b) a tax on bales of cotton ginned at the prescribed rate was challenged by a taxpayer. This Court held that levy of tax on cotton ginned by the taxpayer in excess of the amount prescribed by Article 276 of the Constitution was invalid, and since the Municipality had no authority to levy the tax in excess of the rate permitted by the Constitution, the assessment proceedings levying tax in excess of the permissible limit were invalid, and a suit for refund of tax in excess of the amount permitted by Article 276 was maintainable. The decision was binding on the High Court and the High Court could not ignore it because they thought that "relevant provisions were not brought to the notice of the Court"."
(Emphasis supplied by us).
17. We, therefore, hold that there is no scope of investigating into the question whether the RBI Guidelines in paragraph 2.1 are valid or not in view of the earlier decision of the Supreme Court in the case of Mardia Chemicals [supra] wherein in paragraph 37 of the judgment, those RBI guidelines have been taken note of and at the same time, the Supreme Court approved the position that the RBI is the appropriate authority to declare the norms of NPA and consequently, the said guidelines. We, therefore, hold that the provisions of RBI Page 34 of 75 C/SCA/14908/2013 ORDER guidelines were very much taken into consideration by the Supreme Court and the Supreme Court found that notwithstanding those guidelines the provisions relating NPA were intra vires. Even on merits independent of the above decision, we are convinced that there is no justification of declaring the guidelines by the RBI to be invalid because different period of default has been indicated for declaring an asset as NPA of Banks on one hand and NBFCs on the other. It is rightly pointed out by Mr. Soparkar, the learned counsel appearing for the RBI that the asset mix of Banks varies quite widely from that of NBFCs because unlike the NBFCs, Banks have to mandatorily lend under law for agriculture sector, and its exposure to industrial and infrastructure houses are relatively larger, and hence, the gross NPAs of Banks are not comparable with that of NBFCs. In such circumstances, even the RBI having found, on consideration of all the aspects, that there should be a different fixation periods for NPAs of Banks and NBFCs, sitting in a writ jurisdiction, a High Court cannot interfere with the decision taken by the RBI. After all, those are matters of economic policy, and therefore, the legislature having invested power with the RBI to declare an asset NPA according to its guidelines from time to time, the High Court in writ jurisdiction should not interfere with such guidelines unless those are found to be contrary to any statutory provisions or the Constitution.
18. Even as regards the report of the Usha Thorat Committee, we find substance in the contention of Mr. Soparkar that the report is Page 35 of 75 C/SCA/14908/2013 ORDER recommendatory in nature, and what has been recommended is that the norms of NBFCs should be brought in line with that of the Banks, and not vice-versa, and it is for the RBI to decide whether it would accept the same or not.
19. It is rightly pointed out by Mr. Soparkar that in the matter of economic policy, it falls within the domain of the RBI and therefore, this Court should not interfere with such policy. The observations of the Supreme Court in paragraphs 167 and 169 in the case of VILLIANUR IYARKKAI PADUKAPPU MAIYAM vs. UNION OF INDIA [supra] are relevant, which are quoted below:
"167. In the matter of policy decision and economic tests the scope of judicial review is very limited. Unless the decision is shown to be contrary to any statutory provision or the Constitution, the Court would not interfere with any economic decision taken by the State. The court cannot examine the relative merits of different economic policies and cannot strike down the same merely on ground that another policy would have been fairer and better.
169. It is neither within the domain of the courts nor the scope of judicial review to embark upon an inquiry as to whether a particular public policy is wise or whether better public policy can be evolved. Nor are the Courts inclined to strike down a policy at the behest of a petitioner merely because it has been urged that a different policy would have been fairer or wiser or more scientific or more logical. Wisdom and advisability of economic policy are ordinarily not amenable to judicial review. In matters relating to economic issues the Government has, Page 36 of 75 C/SCA/14908/2013 ORDER while taking a decision, right to "trial and error" as long as both trial and error are bona fide and within the limits of the authority. For testing the correctness of a policy, the appropriate forum is Parliament and not the courts.
20. It further appears that in the case of R.K. GARG VS. UNION OF INDIA reported in (1981) 4 SCC 675, the Supreme Court made the following observations in paragraph 8:-
"8. Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, J., that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or strait-jacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Doud where Frankfurter, J., said in his inimitable style:
"In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The courts have only Page 37 of 75 C/SCA/14908/2013 ORDER the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events -- self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability."
The Court must always remember that "legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry"; "that exact wisdom and nice adaption of remedy are not always possible" and that "judgment is largely a prophecy based on meagre and uninterpreted experience". Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. The courts cannot, as pointed out by the United States Supreme Court in Secretary of Agriculture v. Central Roig Refining Company be converted into tribunals for relief from such crudities and inequities. There may even be possibilities of abuse, but that too cannot of itself be a ground for invalidating the legislation, because it is not possible for any legislature to anticipate as if by some divine prescience, distortions and abuses of its legislation which may be made by those subject to its provisions and to provide against such Page 38 of 75 C/SCA/14908/2013 ORDER distortions and abuses".
21. On consideration of the above material, we, thus, find no merits in the contention of Mr. Shah that paragraph 2.1 of the RBI Guidelines is violative of Article 14 of the Constitution of India.
22. The next question is whether the provisions of section 2(1) (o) of the Securitisation Act [as amended] are ultra vires Article 14 of the Constitution or the Securitisation Act itself.
23. We have already noticed that prior to the aforesaid amendment, the norms of declaring NPA was exclusively within the province of the RBI and it was for the RBI alone to decide the guidelines for declaring the assets of a borrower as NPA irrespective of the fact who is the lender. By the amendment of 2004, the old definition has been divided into two parts; by introduction of clause [a], the duty to frame guidelines relating to asset classification of a borrower from a bank or financial institution which is administered or regulated by an authority or body established, constituted or appointed by any law for the time being in force, lies upon such authority or the body to frame the guidelines , and by introduction of clause (b), in any other cases not governed by clause [a], the same should be in accordance with the directions or guidelines relating to Page 39 of 75 C/SCA/14908/2013 ORDER assets classifications issued by the Reserve Bank. Thus, borrowers are divided in to two different classes; First, the borrowers in respect of the Banks and Financial Institutions which are administered or regulated by an authority or body established, constituted or appointed by any law for the time being in force, and in those cases, it will be for that authority or body to frame the guidelines for asset classification; and, secondly, the borrowers in respect of all other cases not covered by clause [a], and in respect of those cases, it will be in accordance with the directions or guidelines issued by the Reserve Bank for asset classification. We have already pointed out that in the "Object and Reasons" for enactment of the Securitisation Act, in paragraph 2(h), it has been specifically mentioned that the prime object the Securitisation Act was to empower banks and financial institutions giving loan to a borrower to take possession of securities given for financial assistance and sell or lease the same or take over management in the event of default, i.e. classification of the borrower's account as non-performing asset in accordance with the directions given or under guidelines issued by the Reserve Bank of India from time to time, and based on the above object, section 2(1)(o) of the Securitisation Act was enacted. However, by way of the amendment, the Parliament has deviated from the above object of framing guidelines for classification of assets of a borrower as NPA by the RBI, and instead of that, in case of some of the lenders, such power has been conferred to authorities other than the RBI as indicated above.
Page 40 of 75 C/SCA/14908/2013 ORDER
24. We find that the above amendment in section 2(1) (o) of the Securitisation Act is in direct conflict with the Object and Reasons of the Act. The Parliament, in accordance with the object of the Act, permitted the Banks and Financial Institutions to take the drastic step under section 13 of the Securitisation Act only after the assets of the borrowers are found to be NPA in accordance with the guidelines issued by the RBI, and not at the whims of the lender or any other authority. By the amended provisions, the Parliament has moved away from the object of the Act. As indicated earlier, in the case of Mardia Chemicals [supra], the Supreme Court specifically dealt with the question whether on the whims and fancies of the financial institutions, the assets of a debtor can be classified as NPA. The Supreme Court, in paragraph 37 of the judgment specifically held that such contention was not tenable because as a matter of fact, the policy had been laid down by the RBI providing guidelines in the matter of declaring an asset to be NPA known as RBI's prudential norms on income recognition, asset classification and provisioning - pertaining to advances" through a Circular dated August 30, 2001. The observations of the Supreme Court in paragraph 37 of the judgment are relevant, and the same are quoted below:-
"37. Next we come to the question as to whether it is on whims and fancies of the financial institutions to classify the assets as non-performing assets, as canvassed before us. We find it not to be so. As a matter of Page 41 of 75 C/SCA/14908/2013 ORDER fact a policy has been laid down by the Reserve Bank of India providing guidelines in the matter for declaring an asset to be a non-performing asset known as "RBI's prudential norms on income recognition, asset classification and provisioning - pertaining to advances" through a Circular dated August 30, 2001."
25. Therefore, only because the RBI had been authorized to fix the NPA guidelines, the Supreme Court did not find merits in the above contention of the learned advocates of the borrowers, but the moment by subsequent amendment, the Parliament has taken away such power from the hands of the RBI and has entrusted such power with the regulating authority of some of the banks and financial institutions as mentioned in clause (a) of Section 2(1) (o) of the Securitisation Act, such entrustment of fixing guidelines to those authorities at their whims and fancies patently becomes violative of Article 14 of the Constitution of India.
26. In this connection, we may appropriately refer to the following observations of the Supreme Court in the case of Joseph Kuruvilla Vellukunnel v. Reserve Bank of India and others reported in AIR 1962 SC1371 regarding the role of the RBI in the matter of banking industries in India:
"In the present case, in view of the history of the Page 42 of 75 C/SCA/14908/2013 ORDER establishment of the Reserve Bank as a central bank for India, its position as a Bankers' Bank, its control over banking companies and banking in India, its position as the issuing bank, its power to license banking companies and cancel their licences and the numerous other powers, it is unanswerable that between the Court and the Reserve Bank, the momentous decision to wind up a tottering or unsafe banking company in the interest of the depositors, may reasonably be left to the Reserve Bank. No doubt, the Court can also, given the time, perform this task. But the decision has to be taken without delay, and the Reserve Bank already knows intimately the affairs of banking companies and has had access to their books and accounts. If the Court were called upon to take immediate action, it would almost always be guided by the opinion of the Reserve Bank. It would be impossible for the Court to reach a conclusion unguided by the Reserve Bank if immediate action was demanded. But the law which gives the same position to the opinion of the Reserve Bank is challenged as unreasonable. In our opinion, such a challenge has no force. The situation that arose in this case is typical of the occasions on which this extraordinary power would normally be exercised, and, as we have said already, if the power is abused by the Reserve Bank, what will be struck down would be the action of the Reserve Bank but not the law. An appeal against the Reserve Bank's action or a Page 43 of 75 C/SCA/14908/2013 ORDER provision for an ex post facto finding by the Court is hardly necessary. An appeal to the Central Government will be only an appeal from Caesar to Caesar, because the Reserve Bank would hardly act without concurrence of the Central Government and the finding by the Court would mean, to borrow the macabre phrase of Raman Nayar, J., a post-
mortem examination of the corpse of the banking company."
27. For the above reason, the legislature initially decided to confer the responsibility of fixing the norms of NPA under the Securitisation Act to the RBI alone to safeguard the interest of the borrowers.
In this connection, we may profitably refer to the decision of the Supreme Court in the case of J. PANDURANGARAO V. THE A.P. PUBLIC SERVICE COMMISSION, HYDERABAD AND ANOTHER, reported in AIR 1963 SC 268 wherein the Supreme Court laid down the test to decide whether a particular legislation is violative of Article 14 of the Constitution of India in paragraph 7 of the judgment, which reads as under:-
"7. That immediately raises the question about the validity of the impugned rule. The petitioner argues that by prescribing the limitation that the applicant must be an Advocate of the Andhra High Court, the rule has violated his fundamental rights guaranteed under Articles 14 and 16 (1) of the Constitution. As Page 44 of 75 C/SCA/14908/2013 ORDER a result of the rule, persons who are not practicing as Advocates of the Andhra High Court are disqualified and that amounts to unconstitutional discrimination. Art. 14 which provides that the State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India, as well as Article 16(1) which provides that there shall be equality of opportunity for all citizens in matters relating to employment or appointment to any office under the State have been frequently considered by this Court. The scope and effect of the provisions of Article 14 can no longer be the subject-matter of any doubt or dispute. It is well-settled that though Art. 14 forbids class legislation, it does not forbid reasonable classifications for the purposes of legislation. When any impugned rule or statutory provision is assailed on the ground that it contravenes Art. 14, its validity can be sustained if two tests are satisfied. The first test is that the classification on which it is founded must be based on an intelligible differentia which distinguishes persons or things grouped together from other left out of the group; and the second is that the differentia in question must have a reasonable relation to the object sought to be achieved by the rule or statutory provision in question. As the decisions of this Court show, the classification on which the statutory provision may be founded may be referable to different considerations. It may be based on geographical considerations or it may have reference to objects or occupations or the like. In every case, there must be some nexus between the basis of the classification and the object intended to be achieved by the statue, vide Ram Krishna Dalmia v. Justice S. R. Tendolkar, 1959 SCR 279: (AIR 1958 SC
538)."Page 45 of 75 C/SCA/14908/2013 ORDER
(Emphasis supplied by us).
29. We have already pointed out that the object of the enactment of the Securitisation Act was not to leave the fate of the borrowers in the hands of the regulators of banks and financial institutions in the matter of taking possession of the secured assets or selling those for recovery of the dues but to protect their interest from the whims and fancies of the creditors, and for the above reason, only the RBI was given the power to frame the guidelines for such classification. By the amendment impugned in these writ-petitions, the Parliament has taken away such exclusive power of the RBI and in some of the classes of the Banks and financial institutions, such power has been conferred upon regulators or administrators of those Banks and financial institutions where the RBI cannot interfere. Thus, the amendment impugned is violative of article 14 of the Constitution inasmuch it is against the object sought to be achieved by enactment of the Securitisation Act and, at the same time, the classification on which the amendment is founded is not based on an intelligible differentia which distinguishes persons or things grouped together from other left out of the group, and the differentia in question has no relation to the object sought to be achieved by the statutory provision in question. We have already pointed out that the principal object of the Securitisation Act is empowering banks and financial institutions to take possession of securities given for financial assistance and sell or lease the same or take over Page 46 of 75 C/SCA/14908/2013 ORDER management in the event of default, i.e. classification of the borrower's account as non-performing asset in accordance with the directions given or under guidelines issued by the Reserve Bank of India from time to time as appearing from the very object and reason of enacting the Securitisation Act. Thus, there is no nexus between the basis of the classification and the object intended to be achieved by the statute.
30. Our attention has been drawn to the fact that the following financial institutions within the meaning of the Securitisation Act have regulators other than the RBI, and as such, those financial institutions come within the purview of clause (a) of Section 2(1) (o) of the Securitisation Act as amended.
Sl. Institution Regulator No. of No. days 1 EXIM Bank EXIM BANK u/s. 39 of - EXIM Act, 1981 2 NHB (balance sheet data as NHB authority under 90 days on 30.06.2003) NHB Act 3 SIDBI Central Govt. u/s 51A - of the SIDBI Act, 1989 4 NABARD Nabard ( as per s. 39 of - Nabard Act, 1981 ) 5 PFC Ltd. (Power Finance PFC [It is a PFI u/s 4A of Six Corporation Ltd.) the Companies Act] Months 6 REC Ltd. (Rural REC [It is a PFI u/s 4A Six Electrification Corporation of the Companies Act] Months Ltd.) 7 IRFC Ltd. ( Indian Railway Not RBI [as per RBI - Finance Corporation ) report] 8 IREDA Ltd. (as on 31.3.2002) Not RBI [as per RBI Page 47 of 75 C/SCA/14908/2013 ORDER report] 9 NEDFI Ltd.( North Eastern Not RBI ( as per RBI Development Finance Report ) Corporation Ltd. ) 10 HUDCO Ltd. NHB 11 UTI ( Unit Trust of India ) SEBI 12 LIC (Life Insurance Corp.) IRDA established under the IRDA Act, 1999 13 GIC ltd. (Gen. Insurance IRDA established under Corp. of India ) the IRDA Act, 1999
14 NIC ltd. ( National Insurance IRDA established under Company ) the IRDA Act, 1999 15 NIA ltd (New India Assurance IRDA established under ) the IRDA Act, 1999 16 OIC Ltd. (Oriental Insurance IRDA established under Corp.) the IRDA Act, 1999 17 UII ( United India Insurance ) IRDA established under the IRDA Act, 1999 18 Industrial Credit and Investment Corporation of India Ltd.
19 SCICI Ltd. Not in existence now 20 IFCI Venture Capital Funds SEBI Ltd.
21 Technology Development -
and Information Company of India Ltd 22 ICICI Venture Funds SEBI Management Ltd 23 Andhra Pradesh State State Govt. of Andhra Financial Corporation Pradesh 24 Assam Financial Corporation State Govt. of Assam 25 Bihar State Financial State Govt. of Bihar Corporation 26 Delhi Financial Corporation State Govt. of Delhi Page 48 of 75 C/SCA/14908/2013 ORDER 27 Gujarat State Financial State Govt. of Gujarat Corporation 28 Gujarat Industrial State Govt. of Gujarat Investment Corporation 29 Haryana Financial State Govt. of Haryana Corporation 30 Himachal Pradesh Financial State Govt. of Corporation Himachal Pradesh 31 Jammu & Kashmir State State Govt. of Jammu & Financial Corporation Kashmir 32 Karnataka State Financial State Govt. of Corporation Karnataka 33 Kerala Financial Corporation State Govt. of Kerala 34 Madhya Pradesh Financial State Govt. of MP Corporation 35 Maharashtra State Financial State Govt. of Corporation Maharastra 36 Orissa State Financial State Govt. of Orissa Corporation 37 Punjab Financial Corporation State Govt. of Punjab 38 Rajasthan Financial State Govt. of Corporation Rajasthan 39 Uttar Pradesh Financial State Govt. of UP Corporation 40 West Bengal Financial State Govt. of WB Corporation 41 Tamilnadu Industrial State Govt. of TN Page 49 of 75 C/SCA/14908/2013 ORDER Investment corporation Ltd.
42 North Eastern Development As per RBI report they Finance Corporation Ltd. are not governed by RBI, but as per website they are PFI under s.
4A of the Companies Act, and registered as NBFC under the RBI Act, 1934 in 2002.
43 Infrastructure Development -
Finance Company Ltd.
44 Pradeshiya Industrial and Investment Corporation of U.P. Ltd.
45 Rajasthan State Industrial State of Rajasthan Development & Investment Corporation Ltd. RIICO Ltd.
46 State Industrial Development Corporation of State of Maharashtra Maharashtra Ltd 47 West Bengal Industrial State of WB Development Corporation Ltd.
48 Tamil Nadu Industrial State of TN Development Corporation Ltd.
49 Asian Development Bank Central Govt under scheme of the Act.
30.1 On the other hand, the following 11 financial institutions have no regulators created under the law for the time being in force, Page 50 of 75 C/SCA/14908/2013 ORDER and thus, according to the amended provisions of Section 2(1) (o) of the Securitisation Act, those 11 financial institutions are regulated by the RBI.
Sl. Institution Regulator No. of
No. days
1 Scheduled Banks RBI 90 days
2 Multi State Co-operative RBI ( the vires of which 90 days
Bank is pending before this
Hon'ble Court in PIL
159 of 2012 )
3 Local Co-operative Banks RBI ( but Gujarat High 90 days
Court has declared the
notification
empowering the Co-
operative Banks as
ultra vires, pending
before Hon'ble Apex
Court )
4 Non Banking Finance RBI 180 Days
Companies ( u/s 2 (1) (m)
(iv) of the NPA Act, 2002 )
5 Securitisation Companies RBI 180 days
( under NPA Act, 2002 )
6 Indian Renewable Energy It's a PFI u/section 4 A Six
Development Agency Ltd. and also registered months
NBFC with RBI. ( Being
Nbfc )
7 IDBI ( Industrial RBI ( as per RBI report ) 90 days
Development Bank of India )
8 IFCI Ltd. ( Industrial Finance It's a PFI u/section 4 A 180 days
Corporation of India ) and also registered
NBFC with RBI.
9 IIBI Ltd. ( Industrial RBI ( as per RBI report ) -
Investment Bank of India )
10 TFCI Ltd. ( Tourism Finance It's a PFI u/section 4 A Six
Corporation ) and also registered months
Page 51 of 75
C/SCA/14908/2013 ORDER
NBFC with RBI. ( Being
Nbfc )
11 IDFC Ltd. ( Infrastructure RBI (as per RBI report ) -
Development Finance
Company Ltd. )
31. We also find that although the above banks and financial institutions have separate regulators, the RBI has the power and authority to issue policy and directions in respect of those NBFCs as would appear from section 45JA of the RBI Act, which reads as under:
" 45JA. Power of Bank to determine policy and issue directions.
(1). If the Bank is satisfied that, in the public interest or to regulate the financial system of the country to its advantage or to prevent the affairs of any non-banking financial company being conducted in a manner detrimental to the interest of the depositors or in a manner prejudicial to the interest of the non-
banking financial company, it is necessary or expedient so to do, it may determine the policy and give directions to all or any of the non-banking financial companies relating to income recognition, accounting standards, making of proper provision for bad and doubtful debts, capital adequacy based on risk weights for assets and credit conversion factors for off-balance sheet items and also relating to deployment of funds by a non- banking financial company or a class of non-banking financial companies or nonbanking financial companies generally, as the case may be, and such nonbanking financial companies shall be bound to follow the policy so determined and the directions so issued.
Page 52 of 75 C/SCA/14908/2013 ORDER (2). Without prejudice to the generality of the powers vested under subsection (1) the Bank may give directions to non- banking financial companies generally or to a class of non- banking financial companies or to any nonbanking financial company in particular as to-,
(a). the purpose for which advances or other fund based or non-fund based accommodation may not be made; and
(b). the maximum amount of advances or other financial accommodation or investment in shares and other securities which, having regard to the paid-up capital, reserves and deposits of the non-banking financial company and other relevant considerations, may be made by that nonbanking financial company to any person or a company or to a group of companies.
32. Similarly, the Banking Regulation Act, 1949 gives power to the RBI to control advances by banking companies vide section 21 of the BR Act, and also to give directions vide section 35A of the BR Act. Those sections are quoted below:
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 Page 53 of 75 C/SCA/14908/2013 ORDER 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 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 Page 54 of 75 C/SCA/14908/2013 ORDER (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
(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 cancelling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect.
33. It appears that by the amendment impugned in these applications, the exclusive power of the RBI to formulate guidelines for declaring the asset of borrowers as NPA has been taken away in respect of the above financial institutions which come within the purview of clause (a) of Section 2(1) (o) of the Securitisation Act. As a result, a borrower taking loan from those financial institutions will now be governed by the guidelines/norms of NPA declared by those regulators. We, therefore, find that having regard to the object of the Securitisation Act, for the conferment of such power in the hands of some of the secured creditors for the purpose of taking possession of the secured assets and selling those assets deviating from the Page 55 of 75 C/SCA/14908/2013 ORDER general law of the land, the amendment impugned has definitely violated Article 14 of the Constitution of India as such amendment is contrary to the object of the Securitisation Act as pointed out earlier.
34. Thus, we agree that for the purpose of enforcing a statute like the Securitisation Act, which deviates from the ordinary laws of the land relating to attachment, sale and recovery of possession of the secured asset, the fate of a borrower cannot be left in the hands of the regulators of those financiers. We are also impressed by the submissions of Mr. Shah that there was no valid reason for fixation of NPA in respect of some of the financial institutions by the RBI and some other by the regulators of those financial institutions. The amendment makes a clear discrimination either in favour of those financial institutions which are covered under clause (a) of Section 2(1) (o) of the Securitisation Act or against them, when the RBI has no authority in fixation of those NPAs. The regulators, by virtue of the amendment of Section 2(1) (o) of the Securitisation Act, can, at any point of time, take a liberal approach thereby inducing the citizen to take loan from them by fixing a relatively longer period as NPA and at the same time, without any valid reason, for the benefit of only the financial interest of those financial institutions, can also take a stringent policy fixing a relatively shorter period of time for declaring the existing secured assets as NPA. We are conscious that in the Board of the regulators of some of the financial institutions coming Page 56 of 75 C/SCA/14908/2013 ORDER under clause (a) above, the representatives of RBI is also a member, but he will be minority in respect of the entire number of directors of those regulatory authorities.
35. We also fail to find any plausible reason assigned by the legislature for deviating from the policy of being guided by the RBI. Mr. Syed, the learned Assistant Solicitor General of India, however, tried to convince us that since in the matter of regulation of those financial institutions, those regulators are taking the financial decisions, for the enforcement of the Securitisation Act, a different policy decision by the RBI would create problem. We are not at all impressed by such submission. Under those statutes, those regulators can definitely take any decision, whether financial or policy, as provided under the law, but for the purpose of enforcement of the Securitisation Act, a different law altogether from the general law, if the destiny of the borrower is placed in the sole whims and fancies of those regulators, the provisions must be held to be arbitrary. We have already pointed out that the Supreme Court, in the case of Mardia Chemicals [supra] overruled the contention of arbitrariness only on the ground that as the power for deciding NPA was in the hands of RBI, such apprehension was baseless. After the amendment, the apprehension now cannot be said to be baseless, and the basis on which the Supreme Court overruled such contention has now been removed by the legislature by amending Section 2(1) Page 57 of 75 C/SCA/14908/2013 ORDER
(o) of the Securitisation Act, thereby making it violative of Article 14 of the Constitution of India.
36. We now propose to deal with the decisions cited by Mr. Shah appearing on behalf of the petitioners.
37. In the case of CHIRANJIT LAL CHOWDHURI v. UNION OF INDIA reported in AIR 1951 SC 41, Mr. Shah relied upon paragraphs 61 to 67 of the decision of majority [per Mukherje, J.], by contending that the petitioners have discharged the burden by placing material to prove the case of unreasonable classification so as to make the provisions hit by Article 14 of the Constitution of India. 37.1 We have already pointed out that the said decision definitely helps Mr. Shah's clients so far as the amendment introducing Section 2(1) (o) of the Securitisation Act is concerned, but by taking aid of those paragraphs, we cannot hold that the policy taken by the RBI in respect of the NPA is hit by Article 14 of the Constitution of India as indicated earlier.
38. In the case of JYOTI PERSHAD v. UNION TERRRITORY OF Page 58 of 75 C/SCA/14908/2013 ORDER DELHI reported in AIR 1961 SC 1602, the vires of the provisions of the Slum Areas (Improvement and Clearance) Act, 1956 was challenged on the ground that the same violates Article 14 of the Constitution of India. The Supreme Court overruled such contention by holding that there is enough guideline in the Act for exercising discretion by competent authority by section 19(1) of the said Act. 38.1 In the cases before us, if the RBI would have been the sole authority for deciding the norms/guidelines for NPA as was originally enacted and which is also still the object of the statute, the same would not have been hit by Article 14 of the Constitution of India; but the moment the various regulators of financial institutions have been given such power, restricting the exclusive power of RBI to only some categories of the creditors, the said decision will be helpful to the clients of Mr. Shah.
39. In the case of STATE OF RAJASTHAN v. MUKUNDCHAND reported in AIR 1964 SC 1633, the question was whether the portion of section 2(e) of the Rajasthan Jagirdars' Debt Reduction Act, excluding certain debts due to creditors mentioned in clause (i) to (vi) infringed Article 14 of the Constitution of India and was invalid. The Constitutional Bench of the Supreme Court held that the said portion did not satisfy the test of permissible classification. According to the Page 59 of 75 C/SCA/14908/2013 ORDER Supreme Court, the fact that the debts are owned to a Government or local authority or other bodies mentioned in the impugned part of section 2(e) has no rational relationship with the object sought to be achieved by the Act, i.e. to reduce the debts secured on jagirdar lands, which had been resumed under the provisions of the Rajasthan Land Reforms and Resumption of Jagirs Act. The Supreme Court further held that no intelligible principle underlied the exempted categories of debts and the reasons why a debt advanced on behalf of a person by the Court of Guards was clubbed with a debt due to a State or a scheduled bank was not excluded from the purview of the Act was not discernible.
39.1 We also find that having regard to the object of the Securitisation Act as quoted above by us, which still remains unchanged, that the NPA should be decided by the policy adopted by the RBI alone from time to time, there was no justifiable reason for taking away such powers from the hands of the RBI in respect of some of the financial institutions having regard to the object of the Act. However, the above decision, in no way, help Mr. Shah in contending that the RBI guidelines challenged in these applications are invalid.
40. In the case of VAJRAVELU v. SPECIAL DEPUTY COLLECTOR Page 60 of 75 C/SCA/14908/2013 ORDER reported in AIR 1965 SC 1017, the Constitution Bench of the Supreme Court, on a comparative study of the Land Acquisition Act, 1894 and the Land Acquisition (Madras Amendment) Act, came to the conclusion that if a land is acquired for a housing scheme under the amending Act, the claimant gets a lesser value than he would get for the same land or a similar land if it is acquired for a public purpose like hospital under the principal Act. The Supreme Court held that the classification thus sought to be made by the Land Acquisition (Madras Amendment) Act between persons whose lands are acquired for other public purposes has no reasonable relation to the object to be achieved, and is thus, violative of Article 14 of the Constitution of India.
40.1 In the cases before us, we are of the opinion that for the similar reasons, Section 2(1) (o) of the Securitisation Act as amended should be declared ultra vires but by taking aid of the said principle, we cannot declare the policy of RBI as invalid as indicated earlier, more so, when in the case of Mardia Chemicals [supra], the Supreme Court has specifically taken note of the RBI guidelines challenged in these applications and did not find those as ultra vires.
41. In the case of NAGPUR IMPROVEMENT TRUST v. VITHAL RAO reported in AIR 1973 SC 689, the owner whose land was Page 61 of 75 C/SCA/14908/2013 ORDER acquired under the Nagpur Improvement Act was paid compensation not according to the market value but market value according to the use of which the land was put at the date with reference to which the market value is to be determined in that clause. Moreover, solatium of 15% available under the Land Acquisition Act was not made available under the Improvement Trust Act. In other words, if the land was being used for agricultural purposes, even though it has a potential value as a building site, the potential value is to be ignored. Further, the owner did not get solatium of 15% which he would have got if the land had been acquired under the Land Acquisition Act. In such context, the Supreme Court held that the government could acquire the land for a housing accommodation scheme either under the Land Acquisition Act or under the Improvement Trust Act. Thus, it enabled the State Government to discriminate between one owner equally situated from another owner and was, thus, hit by Article 14 of the Constitution of India.
41.1 In the cases before us also, allowing a class of secured creditors of a class of debtors to enjoy the benefit of norms/guidelines for NPA declared by their own regulators in a way different from the one fixed by the RBI in respect of the creditors of another section of the debtors, is opposed to the object of the Statute, and thus, the amended provisions of Section 2(1)(o) of the Securitisation Act is discriminatory and violates Article 14 of the Constitution. We must Page 62 of 75 C/SCA/14908/2013 ORDER not forget that for the business interest of those secured creditors under the control of such regulators, the power to enforce such drastic measure is vested upon such regulators without the RBI having any control on it. In other words, by the amendment challenged in these applications, different creditors have been given rights to treat their debtors according to their whims - may be favourable to the debtors or may be prejudicial to the debtors, leaving others under the guidelines of the RBI.
42. In the case of HARBILAS RAI BANSAL v. STATE OF PUNJAB AND ANR reported in (1996) 1 SCC 1, the controversy was that by the impugned amendment of the rent Act, it created two classes of landlords, one for the commercial premises and the other for residential premises, which the original act never intended. The Supreme Court struck down the amendment as ultra vires as the classification was found arbitrary and unreasonable as the amendment had no nexus with the object of the Act and restored the one originally enacted.
42.1 In our opinion, the same principle applies to the facts of the present case. Having regard to the object of the Securitisation Act for classification of the borrower's account as non-performing asset in accordance with the directions given or under guidelines issued by the Reserve Bank of India from time to time, the Page 63 of 75 C/SCA/14908/2013 ORDER classification created by the amended clause (a) of Section 2(1) (o) of the Securitisation Act has no nexus with the object of the Act.
43. In the case of SAVITRI CAIRE vs. UP AWAS AWAM VIKAS PARISHAD reported in (2003) 6 SCC 255, it was held that although Article 14 of the Constitution of India does not apply in the matter of enforcement of State legislation via-a-vis a parliamentary legislation, having regard to the similar provisions in the two Acts relating to acquisition of land, the acquiring authority and public purposes are the same, the denial of compensation under the Land Acquisition Act to the land owner would be violative under Article 14 of the Constitution of India.
43.1 In our opinion, on the same principles, it can be lawfully contended that there is no justification of fixation of assets of secured creditors as NPA by some of the financial institutions in the hands of the regulators of such financial institutions itself without the control of the RBI, and at the same time, keeping the other strictly under the control of RBI, is violative of Article 14 of the Constitution of India. In our opinion, simply because the financial institutions covered under clause (a) are regulated by some statutory authority, such fact cannot be a justifiable reason for keeping those out of the control of RBI in the matter of fixation of norms/guidelines for NPA when the others Page 64 of 75 C/SCA/14908/2013 ORDER coming within the purview of clause (b) are also guided by the some other statutes, for instance, Banking Regulation Act, Companies Act etc.
44. Lastly, in the case of M/S HOLYSTAR NATURAL RESOURCES PVT. LTD. & ANR vs. UNION OF INDIA & ANR reported in AIR 2014 Del 60, a Division Bench of the Delhi High Court was considering a case where the petitioners challenged the constitutional validity of Section 2(1)(o) of the Securitisation Act as well as that of the Circular dated 1st July, 2013 of the Reserve Bank of India. 44.1 The Delhi High Court in paragraph 47 of the judgment dealt with the question involved herein and observed as follows:
"47. True, the guidelines issued by the RBI and other financial institutions like National Housing Bank are not identical, but, in our opinion, the power to issue guidelines has been rightly vested in the regulator of that particular institution as the said regulator would understand the need of that institution. There can be no quibble over the proposition that if the differentiation is rational, having regard to the objects sought to be achieved, then such differentiation is not discriminatory. Article 14 only forbids unreasonable classification. The burden lies on the petitioners to show that what has been done is irrational and unreasonable. Nothing has been placed before us to show that the classification is irrational or unreasonable.Page 65 of 75 C/SCA/14908/2013 ORDER
In any event, the classification between different banks and financial institutions is founded on an intelligible differentia and the said differentia has a rational relation to the object sought to be achieved."
44.2 With great respect to the above Division Bench of the Delhi High Court we are unable to agree with the observation that the classification between different banks and financial institutions is founded on an intelligible differentia and the said differentia has a rational relation to the object sought to be achieved inasmuch as the object of the Securitisation Act is to confer the power of fixing norms/guidelines for NPA only to the RBI and not to the whims of the regulators of the financial institutions as would appear from the object and reason for enacting the above Act and for which the Supreme Court in the case of Mardia Chemicals (supra) upheld the legality of the Act.
45. On consideration of the entire materials on record, we, therefore, hold that clause (a) of the amended Section 2(1)(o) of the Securitisation Act violates Article 14 of the Constitution of India by discriminating against other financial institutions covered under clause (b) of Section 2(1)(o) of the Securitisation Act.
46. We are of the view that the definition is couched in such a fashion that if clause (a) is held to be ultra vires, then the entire Page 66 of 75 C/SCA/14908/2013 ORDER provision will also be ineffective. In such circumstances, we propose to follow the principle adopted by the Supreme Court in the case of Harbilas Rai Bansal (supra) by declaring the provisions of the amendments made in Section 2(1) (o) of the Securitisation Act constitutionally invalid and as a consequence, restoring the original provisions of Section 2(1) (o) of the Securitisation Act which were operating before coming into force of the amendment and as a result hold that in the matter of fixing the norms/guidelines for NPA, all the financial institutions should be guided by the RBI policy as the same is the specific object of the Securitisation Act.
47. We are quite conscious that for our above view, the petitioners in these applications will not get any material benefit so far as their transactions are concerned because they are all debtors of the financial institution covered by clause (b) of amended Section 2(1) (o) of the Securitisation Act and thus, are governed by the guidelines fixed by the RBI and we have also upheld the policy of the RBI which was challenged through the second prayer made in these applications.
48. However, the petitioners herein have the locus standi to challenge the validity of the amended provisions of Section 2(1) (o) of the Securitisation Act for discriminating them from the debtors of the Page 67 of 75 C/SCA/14908/2013 ORDER Secured creditors falling within clause (a), some of whom have been conferred with the benefit of longer period of the NPA than the one prescribed by the RBI for the petitioners by virtue of the decisions taken by the Administrators or Regulators of those financial institutions and all of them, at any point of time, may be even conferred with longer period of NPA by virtue of any future decision of the regulators of those institutions who are not, in any respect, bound by the guidelines of the RBI for the purpose of fixation of norms/guidelines for NPA.
49. After holding that the provisions contained in Section 2(1) (o) of the Securitisation Act is violative of Article 14 of the Constitution, if we hold that this writ-application is not maintainable at the instance of the petitioners because they being debtors of a nationalized bank, their right is, in no way, affected by the whims and fancy of their creditor, we will be permitting the violation of Article 14 to continue against the petitioners in the following ways:
[1]. Some of the other debtors who have taken loan from some of the creditors falling under clause (a) of Section 2(1) (o) of the Securitisation Act are availing of the larger period of NPA than those falling under Clause (b) like the petitioners and thus, such better benefit to those debtors would deprive the petitioners of their fundamental right of equal protection of law.Page 68 of 75 C/SCA/14908/2013 ORDER
[2]. NPA fixed by the RBI being minimum i.e. 90 days, the petitioners have a right to contend that all the debtors from the financial institution within the meaning of the Securitisation Act should be under the norms of the same authority viz. the RBI which is the object of the above statute in question.
[3]. Having fallen within the purview of the Securitisation Act, a debtor within the meaning of the said Act has legitimate right to contend that all the debtors under the above Act should be governed by the norms of NPA fixed by RBI and no other, and there should not be any possibility of being governed by different norms of NPA fixed by the various regulators of the financial institutions resulting in even the remotest chance of those debtors being differently treated under the selfsame provisions of the Securitisation Act.
50. We, therefore, hold that the petitioners have the locus standi to maintain this application alleging the violation of Article 14 of the Constitution. The law relating to locus Standi has undergone a vast change in the recent years particularly where the statutory provisions are challenged as ultra vires the Constitution.
51. In this connection, we propose to rely upon the following observations of the Supreme Court in the case of Ghulam Qadir v. Page 69 of 75 C/SCA/14908/2013 ORDER Special Tribunal (2002) 1 SCC 33 which has been subsequently, relied upon by another bench of the Supreme Court in the case of M/s. Tashi Delek Gaming Solutions Ltd. and Anr. v. State of Karnataka and Ors reported in AIR 2006 SC 661:
"38. There is no dispute regarding the legal proposition that the rights under Article 226 of the Constitution of India can be enforced only by an aggrieved person except in the case where the writ prayed for is for habeas corpus or quo warranto. Another exception in the general rule is the filing of a writ petition in public interest. The existence of the legal right of the petitioner which is alleged to have been violated is the foundation for invoking the jurisdiction of the High Court under the aforesaid article. The orthodox rule of interpretation regarding the locus standi of a person to reach the court has undergone a sea change with the development of constitutional law in our country and the constitutional courts have been adopting a liberal approach in dealing with the cases or dislodging the claim of a litigant merely on hyper technical grounds. If a person approaching the court can satisfy that the impugned action is likely to adversely affect his right which is shown to be having source in some statutory provision, the petition filed by such a person cannot be rejected on the ground of his not having the locus standi. In other words, if the person is found to be not merely a stranger having no right whatsoever to any post or property, he cannot be non-suited on the ground of his not having the locus standi."Page 70 of 75 C/SCA/14908/2013 ORDER
52. This is not a case of judicial review of an executive action of the statutory authority but is one where the provision of the legislation, conferring unbridled power upon the authorities without laying down any guidelines, and, at the same time, against the specific object of the Statute in question, has been challenged. Thus, the plea, that the petitioners of their own have chosen their creditor from clause (b) and now cannot repent that if he had chosen those falling under clause (a), it would have been benefited, is not tenable as there cannot be waiver of fundamental rights guaranteed by Article 14 of the Constitution of India.
53. The following observations of the Supreme Court in the case of Basheshar Nath v. Commissioner of Income-tax, Delhi and Rajasthan and another reported in AIR 1959 SC 149 on the question of waiver of Article 14 are worthy of quotation:
"Such being the true intent and effect of Art. 14 the question arises, can a breach of the obligation imposed on the State be waived by any person? In the face of such an unequivocal admonition administered by the Constitution, which is the supreme law of the land, is it open to the State to disobey the constitutional mandate merely because a person tells the State that it may do so? If the Constitution asks the State as to why the State did not carry out its behest, will it be any answer for the State to make that "true, you directed me not to deny any person equality before the law, but this person said that I could do so, for he had no, objection to my doing Page 71 of 75 C/SCA/14908/2013 ORDER it." I do not think the state will be in any better position than the position in which Adam found himself when God asked him as to why he had eaten the forbidden fruit and the State's above answer will be as futile as was that of Adam who pleaded that the woman had tempted him and so he ate the forbidden fruit. It seems to us absolutely clear,' on the language of Art. 14 that it is a command issued by the Constitution to the State a matter of public policy with a view to implement its object of ensuring the equality of status and opportunity which every Welfare State, such as India, is by her Constitution expected to do and no person can, by any act or conduct, relieve the State of the solemn obligation imposed on it by the Constitution Whatever breach of other fundamental right a person or a citizen may or may not waive, he cannot certainly give up or waive a breach of the fundamental right that is indirectly conferred on him by this constitutional mandate directed to the State."
54. At this stage we may also aptly refer to the following observations of the Constitution Bench of the Supreme Court in the case of the State of Punjab and another v. Khan Chand reported in AIR 1974 SC 543, which are relevant and quoted below:
"It would be wrong to assume that there is an element of judicial arrogance in the act of the courts in striking down an enactment. The Constitution has assigned to the courts the function of determining as to whether the laws made by the Page 72 of 75 C/SCA/14908/2013 ORDER legislature are in conformity with the provisions of the Constitution. In adjudicating the constitutional validity of statutes, the courts discharge an obligation which has been imposed upon them by the Constitution. The courts would be shirking their responsibility if they hesitate to declare the provisions of a statute to be unconstitutional, even though those provisions are found to be violative of the Articles of the Constitution. Articles 32 and 226 are an integral part of the Constitution and provide remedies for enforcement of fundamental rights and other rights conferred by the Constitution. Hesitation or refusal on the part of the courts to declare the provisions of an enactment to be unconstitutional, even though they are found to infringe the Constitution because of any notion of judicial humility would in a large number of cases have the effect of taking away or in any case eroding the remedy provided to the aggrieved parties by the Constitution. Abnegation in matters affecting one's own interest may sometimes be commendable but abnegation in a matter where power is conferred to protect the interest of others against measures which are violative of the Constitution is fraught with serious consequences. It is as much the duty of the courts to declare a provision of an enactment to be unconstitutional if it contravenes any Article of the Constitution as it is theirs to uphold its validity in case it is found to suffer from no such infirmity."
55. In view of the above discussions, this writ-application is partly allowed by holding that the amended provisions of Section 2(1) (o) of the Securitisation Act are ultra vires the Article 14 of the Constitution and the object of the above Act itself and consequently, we restore the provisions which existed earlier, i.e., prior to the amendment of 2004 and existed at the time of decision of the Supreme Court in the Page 73 of 75 C/SCA/14908/2013 ORDER case of Mardia Chemicals (supra). We, however, uphold the guidelines of the RBI challenged in this application. 55.1 In view of the disposal of this writ-application, the other similar writ-applications heard along with the present one are also disposed of in terms of this judgment. No costs.
Sd/-
(BHASKAR BHATTACHARYA, CJ.) Sd/-
(J.B.PARDIWALA, J.) mathew FURTHER ORDER:-
After the judgment was pronounced, Mr. Shah, the learned advocate appearing on behalf of the petitioners in some of the writ-
applications prays for stay of operation of this judgment.
In view of what has been stated above, we find no reason to stay our judgment. The prayer is refused.
Mr. Shah, thereafter, prays for leave to prefer appeal before the Supreme Court.
The said prayer is also refused.Page 74 of 75 C/SCA/14908/2013 ORDER
However, certified copy of this judgment be given by tomorrow, if applied for.
Sd/-
(BHASKAR BHATTACHARYA, CJ.) Sd/-
(J.B.PARDIWALA, J.) mathew Page 75 of 75