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The Reserve Bank of India issued a circular letter bringing the directions to the notice of companies like Peerless. On September 14, 1973, the Peerless Company ad- dressed a letter to the Reserve Bank of India explaining the nature of their business and claiming that their business was outside the scope of the directions issued by the Re- serve Bank. Most important of all, it was requested that, if it was thought that their business attracted the notifica- tion, they should be granted exemption from the applicabili- ty of the notification as provided by paragraph 13. It was pointed out that their business was of a special type, that it was carried on scientific lines and actuarial principles and that the applicability of the notification would injuri- ously affect two hundred thousands of subscribers that 20,000 persons would lose employment and that the potential for future employment would be destroyed. It was further pointed out that over 90% of the concerned Public Fund was invested in Government securities and in Nationalised Banks. The Balance-sheet of the company, its brochure and a copy of its advertisement were enclosed. The Reserve Bank of India by their order dated December 3, 1973 exempted the company from the provisions of paragraph 4 of the notification in so far as those provisions restricted the acceptance of sub- scriptions under the schemes upto 25% of the paid-up capital and free reserve fund. Certain conditions were however, imposed. The company was directed to transfer every year to the reserve fund a sum not less than 50% of the profit after taxes. The company was directed not to declare any dividend at rates higher than 6% and 7% on ordinary and preferential shares till the free reserve became equal to the paid capital. The company was also required to maintain not less than 75% of its total assets in the form of invest- ments and Government Trustee-securities, etc. The Company was directed to submit every year a certificate from their Auditors in regard to compliance with the conditions im- posed. The exemption was to be reviewed every two years. It appears that there was an inspection in 1974, but we have no information about the findings in the course of the inspec- tion. Evidently, nothing objectionable was found. This is apparent from the affidavit filed on behalf of the Reserve Bank of India in the Calcutta High Court in Civil Rule No. 5941(W)77, a writ petition filed by Favourite Investment Company challenging the refusal of the Reserve Bank to grant them exemption from the Miscellaneous Non-Banking Companies Directions, 1973 and complaining of discrimination in that such an exemption had been granted to Peerless. Comparing the schemes of the two companies, it was pointed out in the affidavit that the Endowment Certificates issued by Peerless Company were for periods ranging from ten to thirty years while the Endowment Certificates granted by Favourite Compa- ny ranged from five to thirty years. It was stated that the schemes of the Favourite Company which ranged for short periods from five to thirty years were unscientific in as much as interest payable by the company on short term cer- tificates was higher than 10% of the instalments or sub- scriptions collected by the company which were invested in Government securities and Banks where field was between five to ten percent. It was noticed that Peerless maintained a fund based on actuarial principles to which the subscrip- tions received from each subscriber from the second year onwards were credited along with compound interest at 8% per annum. It was also noticed that cash and Bank balances in the current account of Peerless and investment in other Government securities on short term and fixed deposits were adequate to meet the contractual obligations of Peerless to its subscribers. It was noticed that while the paid-up capital and reserves of Peerless amounted at that time to Rs.2.33 lakhs and its investment in Government securities and fixed deposits amounted to Rs.105.38 lakhs its deposit liabilities amounted to Rs. 114.76 lakhs. This position was considered satisfactory by the Reserve Bank. It was finally stated "having regard to the satisfactory financial position of the Peerless and the fact that it was a well established one and having regard to the certificate furnished by the actuarial consultant of the Peerless supported by data. It was granted exemption from the provisions of paragraph 4 of the 1973 Directions subject to its compliance with the following conditions." After setting out the conditions it was stated that Peerless had been complying with the conditions and that its finan- cial position continued to be satisfactory. We should men- tion here that whatever vices there may be in the Peerless Scheme and the business methods of Peerless, the financial position of Peerless, on the basis of the criteria mentioned in the affidavit of the Reserve Bank in the Favourire Bank, is far sounder now than then.

The primary question in the present case is whether the Endowment Scheme piloted by the Company falls within the definition of prize chit? Section 3 bans prize chit and money circulation schemes and is in the following terms:
"No person shall promote or conduct any prize chit or money circulation scheme, or enrol as a member to any such chit or scheme, or par- ticipate in it otherwise, or receive or remit any money in pursuance of such chit or scheme. ' ' It is important to notice here that the ban is not merely on promoting or conducting any prize chit or money circulation scheme but also on participation in the scheme. Section 4 makes a contravention of the provisions of Section 3 punish- able with imprisonment for a term which may extend to three years or with fine which may extend to five thousand rupees, or with both. Section 5 makes printing, publishing of any ticket, coupon or other document for use in the prize chit or money circulation scheme with a view to promotion of such scheme in contravention of the Act punishable with imprison- ment etc. So also the printing, publication or distribution of any advertisement of the prize chit or money circulation scheme. The use of any premises for purposes connected with the promotion or conduct of the scheme is also punishable. Section 6 deals with offences by companies. Section 7 deals with the powers of entry, search and seizure. Section 8 provides for the forfeiture of newspapers or other publica- tions containing any material connected with any prize chit or money circulation scheme. Section 11 exempts from the operation of the Act prize chits or money circulation schemes promoted by a State Government or any officer or authority on its behalf, a company wholly owned by a State Government which does not carry on any business other than the conducting of a prize chit or money circulation scheme, a banking institution notified by the Central Government under Section 51 of the Banking Regulation Act, the State Bank of India or a subsidiary bank of the State Bank of India or a corresponding new bank, Regional Rural Bank, a co-operative bank and any charitable or educational institu- tion notified in that behalf by the State Government in consultation with the Reserve Bank of India. There is no general provision which empowers the Central Government or the Reserve Bank of India to exempt any other prize chit or money circulation scheme from the applicability of the Act. Section 12 contains transitional provisions relating to the winding up of the business relat- ing to a prize chit or money circulation scheme which is being conducted at the commencement of the Act. The person conducting the prize chit or money circulation scheme is required to furnish to the State Government or the autho- rised officer and to the Reserve Bank in the prescribed form full information regarding the chit or scheme along with a winding up plan prepared in accordance with the provisions of rules made by the State Government. The State Government, in consultation with the Reserve Bank, is invested with the power to permit such person to continue to conduct the business relating to the chit or scheme for such further period as may be necessary in the circumstances of the case and in the interests of the members of the chit or the scheme. The State Government in consultation with the Re- serve Bank may approve the winding up plan furnished by the person conducting the scheme with or without modifications or reject the same. Section 13 empowers the State Government to make rules for the purpose of carrying out the provisions of the Act. The Government of West Bengal has made the Prize Chits and Money Circulation Schemes (Banning) (West Bengal) Rules, 1979 in exercise of its powers under Section 13 of the Act.
The Miscellaneous Non-Banking Companies (Reserve Bank) Directions 1977 and the Non-Banking Financial Companies (Reserve Bank) Directions came into force on July 1, 1977. On March 3, 1978 the Reserve Bank informed the Peerless Company that under the Miscellaneous Non-Banking Companies Directions which applied to the Company, the Company was prohibited from accepting deposits for more than 36 months and since the deposits accepted by the Company were for periods exceeding 36 months, the Reserve Bank wanted to know what action the Company proposed to take to comply with the requirement stipulating the maximum period for which depos- its might be accepted. In reply, the Company, by its letter dated 31st March, 1978 pointed out the special features of the Company which persuade the Reserve Bank to grant exemp- tion to the Company from the 1973 directions. The Company invited the attention of the Reserve Bank to the various elements of the scheme which made it impracticable to comply with the stipulation regarding the maximum period of 36 months as that would make the scheme wholly unviable. The Company requested that further exemption may be granted in the public interest. The alternative, it was said, would be to close the business and that would mean loss of employment to several thousands of employees and financial loss to millions of depositors. The Company suggested that the Reserve Bank might recommend to the Central Government to convert the undertaking into a joint-sector enterprise. The letter ended with an appeal to the Reserve Bank to grant exemption from the restrictions relating to maximum period. It is not clear what precisely took place subsequently but there was an inspection of the Peerless Company's books by an inspection team appointed by the Reserve Bank of India. The team in its report pointed out various unhealthy features of the schemes managed by the Peerless Company. The principal unhealthy features pointed were:

In the meanwhile on September 3, 1979, the Company filed a writ petition in the Calcutta High Court for a declaration that the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 did not apply to the business carried on by the company. A Rule was issued and an Interim Order was made in favour of the company, first for a limited period and, later, till the disposal of the writ petition. A similar writ petition was filed questioning a notice issued by the Madhya Pradesh Government on the same lines as that issued by the West Bengal Government. A Rule and Interim Order were issued. A learned single Judge of the High Court dismissed both the writ petitions but appeals preferred by the company under the Letters Patent against the judgment of the learned single Judge were allowed by a Division Bench of the Calcut- ta High Court. It was declared that the business carried on by the company did not come within the mischief of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. Against the judgment of the Division Bench of the Calcutta High Court the Reserve Bank of India, the Union of India and the State of West Bengal have preferred Civil Appeal Nos. 3562, 3563, 3564, 3565 and 4459 of 1986. In the course of the judgment, the Division Bench of the Calcutta High Court had observed that the company was a financial institution within the meaning of paragraph 11 of the Non-Banking Finan- cial Companies (Reserve Bank) directions, 1977 and there- fore, the Directions contained therein applied to the business carried on by the company. Against this observation of the Division Bench, the Company has also preferred Civil Appeal Nos. 3566 and 3557 of 1986. We may also mention here that after the judgment of the Division Bench of the Calcutta High Court, the Company, pursuant to the observation of the Division Bench that it was a financial institution within the meaning of paragraph 11 of the Non-Banking Financial Companies Directions, applied afresh to the Reserve Bank of India for exemption from complying with the Directions. The Reserve Bank of India by its order dated August 22, 1986 refused to grant the exemption sought. It appears that the Company has filed another writ petition in the Calcutta High Court against the refusal of the Reserve Bank of India to grant exemption. In view of the pendency of the writ peti- tion in the Calcutta High Court we do not desire to say anything on the merits of the claim of the Company for exemption or on the question whether the Company is a finan- cial institution within the meaning of paragraph 11 of the Non-Banking Financial Companies (Reserve Bank) Directions. We leave that question open as we consider that the appeals preferred by the Reserve Bank of India, the Union of India and the State of West Bengal may be decided without express- ing any opinion on the question. Appeals preferred by the Company are disposed of with these observations. The question for our consideration is, "Is the Endowment Scheme of the Peerless Company a prize chit within the meaning of Section 2(e) of the Prize Chits and Money Circu- lation Schemes (Banning) Act?" The particulars of the scheme are not in dispute. What is its nature? It is not a gambling scheme. It is not a lottery scheme. There are no prizes, no gifts, no elements of chance. It is just a plain Recurring Deposit Scheme such as the many schemes floated by Commer- cial Banks and National Savings Organisation. This is admit- ted in the Inspection Report of the Reserve Bank of India. But, says the Counsel for the Reserve Bank, if money is received in a lumpsum or in instalments and money is uti- lised either for payment of prizes or for refund of the whole or part of the amount of subscription, the scheme is a prize chit as defined. Prize or gift is not an essential element and refund of the amount of subscription is suffi- cient to bring it within the mischief of s.2(e). He says clauses (i) and (ii) of the definition are disjunctive. He emphasises the words "for all or any of the following pur- poses". And, he stresses the fact that the definition is an 'inclusive' one. He says that if Commercial Banks, the National Savings Organisation and others are permitted to receive deposits And to run Recurring Deposit Schemes, they do so under special statutes.