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PETITIONER: PEERLESS GENERAL FINANCE AND INVESTMENTCO. LTD. AND ANR.

       Vs.

RESPONDENT: RESERVE BANK OF INDIA

DATE OF JUDGMENT30/01/1992

BENCH: KASLIWAL, N.M. (J) BENCH: KASLIWAL, N.M. (J) RAMASWAMY, K.

CITATION:  1992 AIR 1033            1992 SCR  (1) 406  1992 SCC  (2) 343        JT 1992 (1)   405  1992 SCALE  (1)216

ACT:      Reserve Bank of India Act, 1934:      Sections 45K (3), 45J, 45I & 45L: Residuary Non-Banking Companies-Receiving  deposits  under  the  saving   schemes- Directions issued by Reserve Bank-Such companies to  deposit with   public  sector  Banks  or  invest   in   unencumbered securities   the   aggregate  amounts  of   liabilities   to depositors-To  disclose the same as liabilites in  order  to secure  return  of the money to  depositors-Such  directions whether  statutory in nature-Whether ultra vires of  Section 45K  (3)-Whether violative of Articles 14 and 19 (1) (g)  of the Constitution of India.      Constitution of India, 1950:      Articles  14, 19 (1) (g), 19 (6): Directions issued  by Reserve  Bank  of India to Residuary  Non-Banking  Companies under  Sections 45 J and 45 K of the Reserve Bank  of  India Act,  1934 safeguarding the interest of the  depositor-Vires of-Whether   directions   on  the   nature   of   reasonable restrictions.      Articles  13  (1)  and (2)  :  Constitutionality  of  a statute-Real effect of the statute to be seen by lifting the veil  of  form  and  appearance  of  legislation-Degree   of encroachment  on fundametal rights-Consideration of-Test  of fairness      and      reasonableness-Applicability      of- Constitutionalty   of  the  statute-Presumption   of-Balance between public interest and individual  interest-Maintaining of.      Practice & Procedure:      Function  of Courts-Matters relating to  financial  and economic  policies-Bodies like Reserve Bank of  India  fully competent-Court not to advise on such matters.

HEADNOTE:      While pronouncing its Judgment in Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd.,  [1987] 1 SCC 424, this Court observed that it would be open to  the Reserve Bank of India (RBI) to take such steps as were  open to it in law to regulate                                                        407 the  savings schemes run by Residuary Non-Banking  Companies (RNBCs) to prevent exploitation of ignorant investors  while

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at  the  same time taking care to protect the  thousands  of employees  working  in  such  companies.   This  Court  also expressed grave concern at the mushroom growth of  financial investment companies offering staggering rates of  interests to  depositors leading to suspicion whether these  companies were  speculative  ventures floated to  attract  unwary  and credulous investors and capture their hard-earned savings.      Pursuant  to  the said observations of this  Court  and keeping in mind the public interest, the RBI in exercise  of its powers under sections 45J and 45K of the Reserve Bank of India  Act,  1934,  and of all powers enabling  it  in  that behalf, issued certain directions by way of Notification No. DFC-55/DG (O)-87 dated 15.5.1987.      A  Writ   Petition  was filed  before  the  High  Court challenging   the  constitutional  validity  of   the   said directions  issued by the RBI.  A Single Judge of  the  High Court  passed  certain  interim  orders.   Being   aggrieved against  the  interim orders, the RBI  preferred  an  appeal before  the Division Bench.  The Division Bench disposed  of the  appeal as well as the Writ Petition.  It held that  the RBI was empowered to issue directions to the Residuary  Non- Banking Companies in the interest of depositors; but to  the extent  such  directions  were found to  be  prohibitory  or unworkable  and  as such unreasonable, would be  beyond  the powers of RBI.      Peerless  which  became a  party-respondent,  filed  an application  for clarification of the judgment,  as  regards payment  against discontinued certificates.  The High  Court clarified  that in such cases the depositors be  allowed  to take loan against payments made till discontinuance on  such terms and conditions as the company may stipulate.      The  present  appeals  were filed by  RBI  against  the orders  of the High Court.  A Writ Petition has  been  filed directly  before this Court, challenging the  directions  as being  ultra  vires of sections 45J and 45K of  the  Reserve Bank of India Act, 1934 as also violative of the  provisions of the constitution.      On behalf of the Writ Petitioners it was contended that since  the 1987 directions issued by RBI were in the  nature of   subordinate   legislation,  it  was  clear   that   RBI overstepped the bounds of the                                                     408 parent  statute;  that the source of power for  issuing  the directions  as  being derived from section 45L was  only  an after-thought;  that  from the working results  it  appeared impossible  to  carry on the traditional  business  for  any longer  period without incurring huge losses; that  from  in the business carried on by Peerless and other similar  RNBCs that   the   working  capital  is  generated  out   of   the subscriptions  received from the certificate holders  either in  lump  sum or in instalments and such deposits  are  paid back with the guaranteed accretions, bonus, interest etc. in terms  of contract at the end of the stipulated  term;  that the interest of the depositors has not been impaired in  any manner  whatsoever by the method of accountancy followed  by Peerless and all similar companies, namely, appropriation of a  part of the subscription to the profit and  loss  account and  meeting  the working capital requirements  out  of  the same.      On  behalf of the appellant-RBI, it was contended  that it had the power to issue the said directions, that the said directions   were  issued  in  pursuance  to  this   Court’s observations,   and  in  public  interest;  that  the   said directions  had not imposed any restriction on the right  to carry on business but only placed a restriction with respect

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to one of the modes of raising reserves i.e. through  public deposits;  that the directions cannot be condemned as  being violative  of Article 19(1) (g); and that formula laid  down by the High Court was self-defeating and deprived altogether the  benefits  of security provisions  given  to  depositors under the 1987 directions.      On  behalf of the Peerless Field Officers  Association, it  was contended that if the directions of 1987 were to  be upheld, the undertakings of Peerless would  face  inevitable closure  and almost 14 lac field officers would  lose  their only source of livelihood.      Allowing  the appeals filed by RBI and  dismissing  the Writ Petition filed by the Finance Companies, this Court,      HELD: Per Kasliwal, J      1.1  The Reserve Bank was competent and  authorised  to issue the impugned directions of 1987, in exercise of powers conferred under Section 45K(3) of the Act. [431 C]      1.2  A combined reading of Section 45J, 45K and 45L  of the  Reserve  Bank of India Act, 1934 unmistakably  goes  to show that the Reserve Bank if it considers necessary in  the public  interest  so  to  do,  can  specify  the  conditions subject to which any prospectus or advertisement  soliciting deposits of money from the public may be                                                        409 issued.    It  can  also  give  directions  to   non-banking institutions  in  respect  of any  matters  relating  to  or connected with the receipt of deposits, including the  rates of  interest payable on such deposits, and the  periods  for which  deposits  may be received.  This latter  power  flows from  sub-section (3) of Section 45K of the Act.   The  Bank under  this provision can give directions in respect of  any matters  relating  to  or  connected  with  the  receipt  of deposits.   Thus  a very wide power is given to the  RBI  to issue  dirctions  in respect of any matters relating  to  or connected  with  the  receipt of  deposits.   It  cannot  be considered  as a power restricted or limited to  receipt  of deposits  only.  Such an interpretation would  be  violating the language of section 45K (3) which furnishes a wide power to the Reserve Bank to give any directions in respect of any matters  relating  to  or  connected  with  the  receipt  of deposits.  The Reserve Bank under this provision is entitled to  give directions with regard to the manner in  which  the deposits  are  to be invested and also the manner  in  which such  deposits are to be disclosed in the  balance-sheet  or books   of  accounts  of  the  company.   The  word    ‘any’ qualifying matters relating to or connected with the receipt of deposits in the above provision is of great  significance and  directions of 1987 are fully covered under Section  45K (3)  of  the Act, which gives power to the Reserve  Bank  to issue such directions. [430 D-H; 431 A]      1.3 When an authority takes action which is within  its competence,  it cannot be said to be invalid merely  because it purports to be made under a wrong provision, if it can be shown to be within its power under any other provision. [431 B]      Indian   Aluminium   Company  etc.  v.   Kerala   State Electricity Board, [1976] 1 SCR 70, relied on.      2.1  The function of the Court  is to see  that  lawful authority  is not abused but not to attain itself  the  task entrusted  to  that authority.  It is well  settled  that  a public  body invested with statutory powers must  take  care not  to exceed or abuse its power.  It must keep within  the limits  of  the authority committed to it.  It must  act  in good  faith and it must act reasonably.  Courts are  not  to interfere  with  economic policy which is  the  function  of

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experts.   It  is not the function of the Courts to  sit  in Judgment  over  matters  of  economic  policy  and  it  must necessarily  be left to the expert bodies.  The function  of the Court is not to advice in matters relating to  financial and economic policies for which bodies like Reserve Bank are fully  competent.  It would be hazardous and risky  for  the Courts to tread an                                                     410 unknown  path  and  should leave such  task  to  the  expert bodies. [442 C-D]      2.2  Reserve Bank of India which is banker’s bank is  a creature  of  Statue.   It has large  contingent  of  expert advice  relating  to matters affecting the  economy  of  the entire  country  and nobody can doubt the  bonafides of  the Reserve  Bank  in issuing the impugned directions  of  1987. The Reserve Bank plays an important role in the economy  and financial  affairs  of  India  and  one  of  its   important functions is to regulate the banking system in the  country. It is the duty of the Reserve Bank to safeguard the  economy and  financial  stability  of  the  country.   In  fact  the directions   of  1987  were  issued  by  RBI  after   mature consideration with the help and advice of experts. [441 B-D, 443 D-E]      Delhi  Cloth and General Mills etc. v. Union  of  India etc., [1983] 3 SCR 438; M/s Prag Ice & Oil Mills and Anr. v. Union of India, [1978] 3 SCC 459; Shri Sitaram Sugar Company Limited and Anr. v. Union of India & Ors., [1990] 3 SCC 223; R.K. Garg v. Union of India & Ors.  etc., [1981] 4 SCC  675, relied on.      3. The Reserve Bank was right in taking the stand  that if  the  companies want to do their  business,  they  should invest  their  own working capital and find  such  resources elsewhere with which the Reserve Bank has no concern.  [445- C]      4.  It is not the concern of this Court to find out  as to whether actuaial method of accounting or any other method would  be  feasible or possible for the companies  to  adopt while carrying out the conditions contained in paragraphs  6 and 12 of the directions of 1987.  The companies are free to adopt  any mode of accounting permissible under the law  but it is certain that they will have to follow the entire terms and conditions contained in the directions of 1987 including those contained in paragraphs 6 and 12. [445 E-F]      5.1 It is not possible for the Court to determine as to how much percentage of deposit of first instalment should be allowed  towards expenses which may consist of commission to agents,  office expenses etc.  It would depend from  company to company based on various factors such as paid-up capital, percentage  of  commission  paid  to  the  agents,  rate  of interest  paid  to the depositors, period  of  maturity  for repayment,   office  expenses  and  various  other   factors necessary  to mop up working capital out of  the  depositors money.                                                        411 One cannot ignore the possibility of persons having no stake of  their  own starting such business and  after  collecting huge  deposits from the investors belonging to the poor  and weaker sections of the society residing in rural areas,  and to  stop such business after a few years thus devouring  the hard  earned money of the small investors.  In such kind  of business,  the  agents always take interest in  finding  new depositors because they get a high rate of commission out of the  first instalment, but they do not have same  enthusiasm in  respect of deposit of subsequent instalments.  In  these circumstances if the Reserve Bank has issued the  directions

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of  1987 to safeguard the larger interest of the public  and small  depositors it cannot be said that the directions  are so unreasonable as to be declared constitutionally  invalid. [447 E-H, 448-A]      5.2  It  cannot  be said that the  directions  of  1987 amount to prohibition of the business in a commercial  sense and  without  reasonable  basis.   Nor  are  the  directions violative of Article 19(1) (g) of the Constitution of India. [442 G-H, 443 A-B]      Mohammad  Yasin v. The Town Area  Committee,  Jalalabad and  Anr., [1952] SCR 572; Premier Automobiles Ltd. and  Anr v.  Union of India, AIR 1972 SC 1690; Shree Meenakshi  Mills Ltd. v. Union of India, AIR 1974 SC 366, referred to.      6.  So  far  as  Peerless  is  concerned  there  is  no possibility  of  its  closing down such  business.   It  has already large accumulated funds collected by making  profits in  the  past serveral years.  Thus it  has  enough  working capital  in order to meet the expenses.  It cannot  be  said that  after some years Peerless will have to close down  its business if the directions contained in paragraphs 6 and  12 are to be followed.  The working capital is not needed every year  as it can be rotated after having invested  once.   If the  entire  amount  of the subscriptions  is  deposited  or invested  in the proportion of 10% in public  sector  banks, 70%  in  approved securities and 20% in  other  investments, such  amounts will also start earning interest which can  be added  and  adjusted  while  depositing  or  investing   the subsequent years’ deposits of the subscribers.  In any  case it lies with the new entrepreneurs while entering such field of  business to make arrangement of their own resources  for working capital and for meeting the expenses and they cannot insist  in  utilising the money of the depositors  for  this purpose.  So far as the companies already in this field they must  have  earned  profits in the past years which  can  be utilised  as their working capital.  It is important to note that the direc-                                                      412 tions of 1987 have been made applicable from 15th May,  1987 prospectively and not retrospectively. [447 H; 448 C-F]      7.  The  directions  of  1987  as  well  as  any  other directions  issued  from time to time by  the  Reserve  Bank relating  to  economic  or financial  policy  are  never  so sacrosanct  that  the  same cannot  be  changed.   Even  the financial budget for every year depends on the economic  and financial policy of the Government existing at the  relevant time.  So far as the impugned directions are concerned if it is found in future that the same are not workable or working against the public interest, the Reserve Bank is always free to  change its policy and scrap or amend the  directions  as and when necessary.  If at any time, the Reserve Bank  feels that the business of the kind run at present by the Peerless and  other companies in terms of the directions of 1987  are not yielding the result as envisaged by the Reserve Bank, it will always be prepared to consider any new proposals  which may  be  conductive  both  in  the  interest  of  the  large multitude of the investors as well as the employees of  such companies. [448 G-H, 449 A-B]      Per Ramaswamy, J. (Concurring) :      1. The directions of 1987 issued by RBI are within  the power of the RBI to provide tardy, stable, identifiable  and monitorable  method  of  operations by  each  RNBC  and  its compliance of the directions.  This will ensure security  to the  depositors at all times and also make the  accounts  of the   company accurate, accountable and easy to monitor  the working system of the company itself and continuance of  its

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workmen.   The directions in paragraphs 6 and 12  are  just, fair  and reasonable not only to the depositors, but in  the long  run  to  the every existence of the  company  and  its continued business itself.  Therefore, they are legal, valid and constitutionally permissible. [464 G-H, 465-A]      2.  Section  45K  of  the Reserve  Bank  of  India  Act empowers  the  RBI to collect information  from  non-banking institutions as to deposit and to give directions that every non-banking  institution shall furnish to the Bank, in  such form,   at  such  intervals  and  within  such  time,   such statements,  information  or  particulars  relating  to   or connected   with  deposits  received  by   the   non-banking institution,  as  may  be specified by  RBI  by  general  or special  order  including the rates of  interest  and  other terms and conditions on which they are received.  Under sub- section (3) thereof the RBI is entitled to issue                                                        413 in   the   public   interest   directions   to   non-banking institutions  in  respect  of  any  matter  relating  to  or connected  with the receipt of deposits including the  rates of  interest  payable on such deposits and the  periods  for which  deposits may be received.  The use of  the  adjective ‘any’  matter relating to or connected with the  receipt  of deposits  is  wide and comprehensive to empower the  RBI  to issue directions in connection therewith or relating to  the receipt  of deposits.  But exercise of the power  is  hedged with and should be ‘in the public interest’. [450 C-F]      3.1  The  State  can  regulate  the  exercise  of   the fundamental  right  to save the public  from  a  substantive evil.   The  existence  of the evil as  well  as  the  means adopted  to  check it are the matters  for  the  legislative judgment.  But the court is entitled to consider whether the degree  and  mode  of the regulation is  in  excess  of  the requirement or is imposed in an arbitrary manner.  The Court has  to  see  whether the measure  adopted  is  relevant  or appropriate  to  the  power exercised by  the  authority  or whether  it over stepped the limits of  social  legislation. Smaller  inroads may lead to larger inroads  and  ultimately result  in  total  prohibition by indirect  method.   If  if directly   transgresses  or  substantially  and   inevitably affects  the fundametal right, it becomes  unconstitutional, but  not  where  the impact is  only  remotely  possible  or incidental.   The Court must life the veil of the  form  and appearance to discover the true character and the nature  of the legislation, and every endeavour should be made to  have the  efficacy  of  fundamental  right  maintained  and   the legislature is not invested with unbounded power.  The Court has,   therefore,  always  to  guard  against  the   gradual encroachments  and strike down a restriction as soon  as  it reaches  that magnitude of total annihilation of the  right. [453 F-H, 454 A]      3.2 In the interest of the general public, the law  may impose  restrictions on the freedom of the citizen to  start or  carry  on his business.  Whether an  impugned  provision imposing  a fetter on the exercise of the fundamental  right guaranteed  by  Article 19(1) (g) amounts  to  a  reasonable restriction imposed in the interest of general public,  must be  adjudged  not  in  the  background  of  any  theoretical standard  or pre-determinate patterns, but in the  light  of the  nature and the incidence of the right, the interest  of the  general  public  sought  to  be  secured  by   imposing restrictions  and the reasonableness of the quality and  the extent of the fetters imposed by the directions.  The credit worthiness of RNBCs undoubtedly would                                                    414

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be sensitive.  It thrives upon the confidence of the public, on  the  honesty  of its management and  its  reputation  of solvency.  The directions intended to promote ‘freedom’  and facility which are required to be regulated in the  interest of all concerned. [457 E-F]      Hatisingh  Mfg.  Co. Ltd. & Anr. v. Union  of  India  & Ors., [1960] 3 SCR 528; Latafat Ali Khan & Ors. v. State  of U.P., [1971] Supp. SCR 719, relied on.      4.  There is presumption of constitutionality of  every statute  and  its  validity  is  not  to  be  determined  by artificial  standards.  The court has to examine  with  some strictness  the  substance of the legislation to  find  what actually  and  really the legislature has done.   The  court would  not  be over persuaded by the mere  presence  of  the legislation.   In adjudging the reasonableness of  the  law, the  court  will necessarily ask the  question  whether  the measure or scheme is just, fair, reasonable and  appropriate or unreasonable, unnecessary and arbitrarily interferes with the  exercise  of the right guaranteed in Part  III  of  the Constitution.  The Court has to maintain a delicate  balance between  the  public interest envisaged  in  the  challenged provision and the individual’s right taking into account the nature  of  his right said to be infringed,  the  underlying purpose  of the restriction, the extent and urgency  of  the evil  sought to be remedied  thereby, the  disproportion  of the  restriction  imposed, the prevailing condition  at  the time,  the  surrounding  circumstances,  the  larger  public interest  which  the  law seeks to  achieve  and  all  other relevant factors germane for the purpose.  All these factors should  enter  into the zone of consideration  to  find  the reasonableness  of  the  impugned  restriction.   The  Court weighs  in each case which of the two conflicting public  or private interest demands greater protection and if it  finds that  the  restriction  imposed  is  appropriate,  fair  and reasonable,  it  would uphold the  restriction.   The  court would  not  uphold  a restriction which is  not  germane  to achieve the purpose of the statute or is arbitrary or out of its limits. [454 B-C, E-G]      5.  The directions are incorporated and became part  of the  Act  itself.   They  must  be  governed  by  the   same principles as the statute itself.  The statutory presumption that  the  legislature  inserted every part  thereof  for  a purpose and the legislative intention should be given affect to,  would be applicable to the directions of 1987 as  well. [445-E]      6.1  The  RBI  issued the directions  to  regulate  the operations                                                        415 of  the RNBCs, to safeguard the interest of the  depositors. Payment  of interest, bonus, premium or other advantage,  in whatever  name  it may be called is reward  for  waiting  or parting with liquidity.  It is paid because of positive time preference  (one  rupee  today is  preferred  to  one  rupee tomorrow)  on  the part of the  depositor.   Therefore,  the directions avowed to preserve the right of the depositors to receive  back the amount deposited with the contracted  rate of  interest; it aims to prevent depletion of  the  deposits collected  from the weaker segments of the society and  also tends  to affect free flow of the business of the RNBCs  who would desire to operate in their own way. [455 F-H]      6.2 Mushroom growth of non-banking agencies put  afloat diverse schemes with alluring offers of staggering high rate of interest and other catchy advantages which would generate suspicion   of  the bona fides of the offer.   But  gullible depositors  are lured to make deposits.  It is not  uncommon

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that after collecting fabulous deposits, some   unscrupulous people  surreptiously close the company and decamp with  the collections  keeping the depositors at bay.  Therefore,  the need  to regulate the deposits/subscriptions, in  particular in private sector became imperative to prevent  exploitation or mismanagement as a social justice strategem. [457 A-B]      6.3  RBI  occupies place of  ‘pre-eminence’  to  ensure monetary  discipline  and  to regulate the  economy  or  the credit  system  of the country as an expert body.   It  also advises  the  Government  in  public  finance  and  monetary regulations.   The banks or non-banking  institutions  shall have  to  regulate their operations in accordance  with  not only as per the provisions of the Act but also the rules and directions  or instuctions issued by the RBI in exercise  of the  power  thereunder.  Chapter 3B of the Reserve  Bank  of India  Act expressly deals with regulations of  deposit  and finance  received by the RNBCs.  The directions,  therefore, are statutory regulations.  [455 B-D]      Joseph Kuruvilla Vellukunnel v. Reserve Bank of India & Ors.,  [1962] Suppl. 3 SCR 632; State of U.P. v.  Babu  Ram, [1961]  2 SCR 679; D.V.K. Prasada Rao v. Govt. of A.P.,  AIR 1984 A.P. 75, relied on.      7.  The  objects of the direction are to  preserve  the ability  of the RNBC to pay back to  subscribers/depostitors at any given                                                      416 time;  safety  of the subscribers’ money and  his  right  to unencumbered repayment are thus of paramount public interest and  the directions aimed to protect them.   The  directions cannot  and  would  not be adjudged to  be  ultra  vires  or arbitrary  by reasons of successful financial management  of an  individual  company.   An overall view  of  the  working system of the scheme is relevant and germane. [460 C-D]      8.  The  obligation  in  paragraph  12  of   periodical disclosure  in  the accounts of a company  of  the  deposits together  with the interest securd thereon, whether  or  not payable,  but admittedly due as a liability, is  to  monitor the  discipline  of  the operation of the  schemes  and  any infraction, would be dealt with as per law.  The certificate by  a  qualified Chartered Accountant is  to  vouchsafe  the correctness  and  authenticity  of accounts  and  would  and should adhere to the statutory compliance. [460 D-E]      9.  The settled accounting practice is that a  loan  or deposit  received  from  a creditor has to  be  shown  as  a liability  together  with accrued interest  whether  due  or deferred.  The actuarial accounting applies to revenues  and costs  to  which the concept of the ‘going concern’  can  be adopted.   Therefore, in providing the costs of the  company it  can set apart its costs on the basis that  liability  is created  for  interest, bonus etc.  payable  in  foreseeable future.  Undoubtedly the actuarial principle applied by  the LIC  or  the gratuity schemes are linked with  life  of  the assured  or  the  premature death before  retirement  of  an employee,  but RNBC in its contract does not  undertake  any such risk.  The deposit or loan is a capital receipt but not a  revenue receipt and its full value shall be shown in  the account books or balance-sheet as liability of the  company. It cannot be credited to the profit and loss account.   Part II  of Schedule I of the Companies Act, 1956  requires  that the  amount shown in the profit and loss account  should  be confined to the income and expenditure of the company.  Para 12  of  the  directions is, thus,  in  consonance  with  the Companies  Act. Paragraph 6 only elongates the  contract  in the  public  interest  to  safeguard  the  interest  of  the vulnerable  sections of the depositors.  The RBI  cannot  be

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expected  to constantly monitor the working of the  RNBC  in its  day-to-day  function.  The actuarial  basis  cannot  be adopted  by  the  RNBCs. and the liability  must  always  be reflected   in   its  balance-sheet  at  its   full   value. Compliance of the direction in para 12, dehors any method of accountancy adopted by a company, intended to discipline its operations. [460 E-H, 461 A-C]                                                        417      10.  Regulation includes total prohibition in  a  given case  where  the  mischief to  be  remedied  warrants  total prohibition.   The directions of 1987 are neither   palpably arbitrary nor unjust nor unfair.  The mechanism  evolved  in the directions is fool-proof, to secure the interest of  the depositors,  as well as capable of monitoring  the  business management of every RNBC.  It also protects the interest  of the   employees/field   staff/commission  agents   etc.   on permanent  basis  over-coming initial  convulsion.   It  was included,  in  the  best possible manner,  to  subserve  the interest  of  all  without putting any  prohibition  in  the ability of a company to raise the deposit, even the  absence of any adequate paid up capital or reserve fund or such pre- commitment of the owner, to secure such deposits. [462 E-G]      Narendra  Kumar  v. Union of India, [1960] 2  SCR  375, relied on.      Reserve Bank of India etc. v. Peerless General  Finance and  Investment  Co.  Ltd.  & Ors. etc.,  [1987]  2  SCR  1, referred to.      11.  So long as the power is traceable to the  statute, mere  omission to recite the provision does not  denude  the power  of the legislature or rule making authority  to  make the  regulations,  nor consiered without authority  of  law. The asbsence of reiteration of objective satisfaction in the preamble  as  of one under Section 45L does not  denude  the powers; the RBI admittedly has the power under Section  45L, to  justify  the actions.  Though Section  45L  was  neither expressly  stated  nor  mentioned in  the  Preamble  of  the directions  of  the required recitation or  satisfaction  of objective facts to issue the directions, from the facts  and circumstances  it  is demonstrated that the  RBI,  had  such satisfaction  in its consideration the power  under  Section 45L,  when  the  directions  were  issued.   Even  otherwise Section   45K  (3)  itself  is  sufficient  to  uphold   the directions. [464 F-H]      1.2.  The court has to see whether the scheme,  measure or  regulation  adopted is relevant or  appropriate  to  the power exercised by the authority.  Prejudice to the interest of  depositors  is  a  relevant  factor.   Mismanagement  or inability to pay the accrued liabilities are evils sought to be  remedied.  The directions of 1987 designed  to  preserve the  right of the depositors and the ability of RNBC to  pay back the contractual liability.  It also intended to prevent mismanagement  of  the deposits  collected  from  vulnerable social segments who have no knowledge of banking  operations or  credit  system and repose unfounded blind faith  on  the company  with  fond  hope of its ability  to  pay  back  the contracted amount.  Thus the directions maintain                                                    418 the  thrift  for saving and streamline  and  strengthen  the monetary operations of RNBCs. [463 E-G]

JUDGMENT:      ORIGINAL JURISDICTION: Writ Petition (Civil) No. 677 of 1991.

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    (Under Article 32 of the Constitution of India)                             WITH      Civil Appeal Nos.400-403 of 1992.      Shanti  Bhushan,  Somnath Chatterjee,  Biswarup  Gupta, Bhaskar Gupta, G.L. Sanghi, Arun Jaitley, Dr. Debi Pal, Anil Diwan  A.K.  Sen, Harish N. Salve, H.S.  Prihar,  Kuldip  S. Parihar,  Gopal Subramanium, Abhijit Chatterjee, B.  Lahiri, J.B. Dadachanji, S.Sukumaran, R.F. Nariman, G.S. Chatterjee, Ms.  Sumita  Chatterjee, Ms. Mridula Ray,  Arun  Madan,  Ms. Priya  Hingorani,  Ms.  Radha  Rangaswamy,  C.N.  Sreekumar, Rathin  Das,  Ranjit  Ghose, Sushil  Kumar  Jain,  Sudhanshu Atreya and Dr. A.M. Singhvi for the appearing parties.      The Judgment of the Court was delivered by      KASLIWAL,   J.  Special  Leave  granted  in   all   the petitions.      This  litigation  is  an upshot  of  the  earlier  case Reserve  Bank  of  India v.  Peerless  General  Finance  and Investment  Company  Ltd. and Others, [1987]  1  S.C.C.  424 decided on January 22,1987. In 1978 th Prize Chits and Money Circulation  Scheme  (Banning)  Act,  1978  (in  short  ‘the Banning Act, was enacted ‘to ban the promotion or conduct of prize  chits  or money circulation schemes and  for  matters connected  therewith  or incidental ‘hereto.’  The  question which  arose  in the above case was  whether  the  Endowment Scheme   piloted  by  the  Peerless  General   Finance   and Investment   Company  Ltd.,  (hereinafter  in   short   ‘the Peerless’)  fell  within  the definition  of  ‘Prize  Chits’ within’  the meaning of Sec. 2(e) of the above Banning  Act. By  a letter dated July 23, 1979, the Reserve Bank of  India pointed out to the Peerless that the schemes conducted by it were covered by the provisions of the Banning Act which  had come  into force w.e.f. December 12, 1978. On  September  3, 1979 the Peerless filed a writ petition in the Calcutta High Court for a declaration that the Prize Chits Banning Act did not  apply  to the business carried on by  the  Peerless.  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                                                        419 Government.  A  learned  Single  Judge  of  the  High  Court dismissed  both the writ petitions but appeals preferred  by the  Peerless  under the Letters Patent were  allowed  by  a Division Bench of the Calcutta High Court.     It  was  declared that the business carried  on  by  the Peerless did not come within the mischief of the Prize Chits Banning  Act. 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  preferred appeals  before this court. The question considered  in  the above  case  was ‘‘Is the endowment scheme of  the  Peerless Company  a Prize Chit within the meaning of Section 2(e)  of the  Prize  Chits and Money  Circulation  Schemes  (Banning) Act?’’   This  court  held  that  section  2(e)   does   not contemplate  a  scheme without a prize and,  therefore,  the Endowment  Certificate  Scheme of the Peerless  Company  was outside  the Prize Chits Banning Act. Appeals filed  by  the Reserve  Bank of India, the Union of India and the State  of West  Bengal were accordingly dismissed. Chinnappa  Reddy,J. observed:          ‘‘It is open to them to take such steps as are open          to  them in law to regulate schemes such  as  those          run by the Peerless Company to prevent exploitation          of ignorant subscribers. Care must also be taken to          protect  the  thousand of employees. We  must  also          record our dissatisfaction with some of the schemes

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        of  the Life Insurance Corporation which appear  to          us to be even less advantageous to the  subscribers          than  the  Peerless Scheme. We suggest  that  there          should  be a complete ban on forfeiture clauses  in          all  savings  schemes,  including  Life   Insurance          Policies,  since  these  clauses  hit  hardest  the          classes of people who need security and  protection          most.  We  have explained this earlier  and  we  do          wonder  whether the weaker sections of  the  people          are  not  being  made  to  pay  the  more  affluent          sections! Robbing Peter to pay Paul? It was further          observed ‘‘We would also like to query what  action          the  Reserve Bank of India and the Union  of  India          are  taking  or  proposing  to  take  against   the          mushroom   growth   of   finance   and   investment          companies’’  offering  staggeringly high  rates  of          interest  to  depositors  leading  us  to   suspect          whether   these  companies  are   not   speculative          ventures  floated to attract unwary  and  credulous          investors  and capture their savings. One has  only          to look at the morning’s newspaper to be greeted by          advertisements   inviting  deposits  and   offering          interest  at astronomic rates. On January  1,  1987          one  of  the  national  newspapers  published  from          Hyderabad, where one of us happened to be spend-                                                    420          ing   the   vacation,  carried  as  many   as   ten          advertisements with ‘banner headlines’ covering the          whole of the last page, a quarter of the first page          and  conspicuous  spaces in  other  pages  offering          fabulous  rates  of interest. At least two  of  the          advertisers  offered  to double the deposit  in  30          months, 2000 for 1000, 10,000 for 5,000, they said.          Another advertiser offered interest ranging between          30  per  cent to 38 per cent  for  periods  ranging          between  six months to five years. Almost  all  the          advertisers offered extra interest ranging  between          3  per  cent to 6 per cent if  deposits  were  made          during  the  Christmas-Pongal  season.  Several  of          them offered gifts and prizes. If the Reserve  Bank          of India considers the Peerless Company with  eight          hundred  crores invested in government  securities,          fixed deposits with National Banks etc. unsafe  for          depositors, one wonders what they have to say about          the   mushroom  non-banking  campanies  which   are          accepting deposits, promising most unlikely  return          and what action is proposed to be taken to  protect          the investors. It does not require much imagination          to realise the adventurous and precarious character          of  these  business. Urgent action  appears  to  be          called for to protect the public. While on the  one          hand  these schemes encourage two  vices  affecting          public  economy, the desire to make quick and  easy          money  and  the  habit of  excessive  and  wasteful          consumer spending, on the other hand the  investors          who  generally  belong  to the  gullible  and  less          affluent classes have no security whatsover. Action          appears imperative.’’     Khalid,  J.,  another learned Judge aggreeing  with  the judgment of Chinnappa Reddy, J., further added his short but important concluding paragraph as under :          ‘‘I  share my brother’s concern about the  mushroom          growth of financial companies all over the country.          Such  companies have proliferated. The  victims  of          the  schemes, that are attractively put forward  in

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        public  media,  are mostly middle class  and  lower          middle  class  people. Instances are  legion  where          such  needy  people  have  been  reduced  penniless          because  of  the  fraud played  by  such  financial          vultures.  It is necessary for the  authorities  to          evlove fool-proof schemes to see that fraud is  not          allowed  to  be  played upon persons  who  are  not          conversant  with  the practice  of  such  financial          enterprises  who pose themselves as benefactors  of          people.’’     Taking  note  of the weighty observations made  by  this Court, the                                                        421 Reserve Bank of India in exercise of the powers conferred by Section 45 (J) and 45 (K) of the Reserve Bank of India  Act, 1934  (hereinafter  referred to as the Act) and of  all  the powers  enabling  it  in  this  behalf  and  considering  it necessary  in the public interest issued certain  directions by notification No. DFC.55/DG(O)-87 dated the 15th May, 1987 (hereinafter  referred to as the ‘directions of 1987’).  The constitutional  validity  of these directions  of  1987  was challenged  by  Timex Finance and  Investment  Company  Ltd. (hereinafter  referred  to as ‘Timex Company’) by  filing  a writ petition in the Calcutta High Court before the  learned Single  Judge. The learned Single Judge granted  an  interim order in terms of prayers (g) and (h) of the writ  petition. The  Reserve  Bank of India aggrieved  against  the  interim order  filed  an appeal before the Division  Bench.  A  stay petition  was  also moved on behalf of the Reserve  Bank  of India  for  staying  the operation of the  order  dated  7th October,  1988  passed by the learned  Single  Judge.  After hearing  the stay petition for sometime, the Division  Bench of  the  High Court listed the appeal as well  as  the  stay petition for final disposal. The Division Bench of the  High Court disposed of the appeal as well as the writ petition by an  order dated March 23, 1990 and arrived to the  following and conclusions.     "(a) Reserve  Bank  of  India  is  empowered  to   issue          directions  to the residuary non-banking  companies          under the provisions of Section 45J and 45K of  the          Reserve Bank of India Act, 1934 for the interest of          thousands of depositors.      (b) However, to the extent such directions are found to          be   prohibitory  or  not  workable  and  as   such          unreasonable  must be held to be beyond the  powers          of the Reserve Bank of India.      (c) The   impugned  directions  providing   that   they          represent irreducible minimum for safeguarding  the          interest  of  and for  preventing  exploitation  of          small  and unwary depositors cannot be  implemented          without suitable modification. It is not reasonably          practicable to comply strictly with the  directions          as  they  stand  by the writ  petitioners  and  the          similarly situated companies. The Supreme Court  in          Peerless  case (Supra).....reserved the liberty  to          the Reserve Bank of India to take such steps as are          open to them in law to regulate the schemes such as          those   granted   by  the   Peerless   to   prevent          exploitation   of   subscribers  and   to   protect          thousands  of  employees. The  impugned  directions          without  modifications  will  run  counter  to  the          aforesaid directions of the Supreme Court.      (d) The business of savings and investments carried  on          by  the  company and similarly  situated  companies          having not been declared unlawful or banned,  power

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        of the Reserve Bank of India to regu-                                                      422          late  such  business  cannot  be  permitted  to  be          prohibitory  resulting in the ultimate  closure  of          the  business  carried on by  the  writ  petitioner          company and other similarly situated companies.  If          the  modifications  as  suggested  by  us  are  not          implemented  and  if  ultimately  the  business  is          closed down and the company goes into  liquidation,          the  hard earned money of thousands  of  depositors          will  be  lost and the employees  would  also  lose          their job. If even after modifications are made  to          the impugned directions in terms of this order, any          company fails to comply  with such directions,  the          Government may take such steps as are open to  them          to protect the interests of the thousands of  small          depositors and numerous employees.      (e) The  reasons why the impugned directions cannot  be          complied  with  and  held  to  be  unworkable   and          unreasonable  are mainly because of the  definition          of  liability assigned in the impugned  directions.          The impugned directions, as they stand now,  cannot          be   implemented  by  the   residuary   non-banking          companies  without incurring loss  irrespective  of          their   net-worth.   According  to   the   impugned          directions,  the liability is the amount  of  money          deposited  by  the depositions plus the  amount  of          interest  whether or not due to them  according  to          the terms of the respective contracts at the  given          point   of  time.  In  other  words,   the   entire          collection  with the interest, Bonus, etc.  whether          payable  or  not  would be  the  liability  of  the          Company.  This leaves no fund for working.  If  the          definition of liability is amended as suggested  by          us,  it  will  be possible  for  the  companies  to          generate working capital. In our view, liability in          clause  6  and  in other clauses  of  the  impugned          directions should be construed to mean total amount          of  contractual  dues of the  depositors  including          interest,  premium,  bonus or other  advantages  by          whatever   name  called,  accrued  on  the   amount          according  to  the terms of contract.  Section  45J          and  45K  of the Act do not authorise  the  Reserve          Bank  of India to introduce a concept of  liability          which  is  contrary  to  the  accepted   commercial          practice  and  trading  principles.  The   impugned          directions have failed to make distinction  between          the actual liability in presenti and a liability de          futuro.  Liberty must be reserved to the  companies          to adopt normal accountancy practice recognised and          accepted  in  the trading circles so long  as  such          accounting  practice  provides for payment  of  the          liability to the depositors in accordance with  the          contractual obligations. However, the Reserve  Bank          of  India  may,  having regard  to  the  facts  and          circumstances   of  each  case   issue   directions          regulating   the  administrative   and   management          expenses and expenditure on com-                                                        423          mission  and publicity. In the impugned  directions          no restriction has been imposed on the  expenditure          by a residuary non-banking company on any of  these          heads.          In  our  view,  the  impugned  directions   without          modifications, instead of suppressing the mischief,

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        will   only  lead  to  adverse  unworkable   and/or          impracticable results inasmuch as if the  residuary          non-banking  companies  cannot  comply  with   such          directions  in toto, such companies have to go  out          of  existence.  This cannot be the  object  of  the          impugned  directions. If the liability in terms  of          the contractual obligations is provided not only in          the  accounts  but also by suitable  investment  in          terms  of Clause 6 of the directions, in our  view,          all    the   residuary    non-banking    companies,          irrespective  of their net worth, will be  able  to          carry on the business.     (f)  Every residuary non-banking company shall  disclose          its  Books  of  Accounts  and  balance  sheet   the          aggregate  amount of liability accrued and  payable          to  the depositors in accordance with the terms  of          the contract.     (g)  The directions contained in clause 6 for deposit or          investment and the liability shall be read  subject          to  the  modification  of the  designation  of  the          liability as aforesaid.     (h)  The  directions  are  prospective.  The  period  of          deposit and the date of return with respect to  all          certificates  issued  prior to 15th May  1987  have          been excluded from the purview of the directions as          per  clause 18 (1). This exemption  should  include          all contractual obligations on those certificates.     (i)  All  funds  prior to the issue  of  the  directions          should  be allowed to be kept in the manner as  was          being done by the respective residuary  non-banking          company.   The   direction  with  regard   to   the          investment  shall  be  applicable  from  the  money          collected  and/or  received on and after  15th  May          1987.  The  companies shall be  allowed  reasonable          time to make good the deficiency in the  investment          required  to  be made in terms  of  the  directions          after 15th May 1987.    (j)    We are not unmindful of the fact that exercise  of          power  by legislature and executive is  subject  to          judicial  restraint.  The only  check  on  judicial          exercise of power is the self-imposed dicipline  of          judicial  restraint.  But although  the  courts  in          exercise  of  judicial power are not  competent  to          direct  the enactment of a particular provision  of          law,  if  the  statutory  directions  suffer   from          arbitrariness,  the  court is  competent  to  issue          necessary   direction   so   that   the   statutory          directions may be brought in conformity                                                      424          with law. As we have held that the Reserve Bank  of          India  has transgressed the statutory power to  the          extent indicated elsewhere in the judgment, we  are          of  the view that the Reserve Bank of  India  shall          modify the directions and make them reasonable  and          workable  to safeguard the interest  of  depositors          and protect the employees.’’     The Division Bench also considered an application  filed by  Favourite  Small Investment Company and by  order  dated 20th December, 1990 directed that the Reserve Bank of  India should  revoke  the prohibitory order and  permit  Favourite Small Investment Company to accept fresh deposits and  carry on new business.     It  may  be  noted that the Peerless  filed  a  petition before  the High Court for becoming a party-respondent.  The High Court by order dated 31st August, 1990 allowed the said

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application and further ordered that the cause title and the records proceedings of appeal, memorandum of appeal and  the paper  book filed be amended accordingly. The Peerless  also moved  an application for clarification of the judgment  and order  dated  23rd  March, 1990.  It  prayed  that  suitable provision should be made for a depositor who wants back  the money  before  maturity.  If the depositor  intends  to  get refund  of  the money invested before the expiry  of  actual contract period, he should be required to keep the funds for a  minimum  period in accordance with the  contract.  Before maturity he can only take loan but not the principle  amount with  interest. The amounts of returns should also  be  less than  5  per cent to provide for the  collection  and  other expenses of the non-banking companies. The Division Bench of the  High  Court  took the view that the  order  dated  23rd March, 1990 required clarification as it was not made  clear as to whether non-residuary  banking companies are under  an obligation  to  pay  discontinued  certificates  before  the stipulated  period in the contract, if so what would be  the rate  of  interest.  The  Division  Bench  by  order   dated December  24,  1990 clarified its earlier order  dated  23rd March, 1990 as under :   ‘‘(a)  If the contract by and between the company and  the          depositor provides that no payment on  discontinued          certificate  will be made before the expiry of  the          term stipulated in the contract, in such cases,  if          the  certificate  is discontinued any  time  before          such  stipulated  term and payment is made  to  the          depositors according to the terms and conditions of          the contract, in other words, on the expiry of  the          term  stipulated  in the contract,  such  depositor          shall  be paid interest at the rate of 8%  compound          per  annum, but in such a case the company will  be          at  liberty  to deduct an amount not  exceeding  5%          from  the  total  return  in  or  to  provide   for          collection   and   other   expenses   incurred   in          connection with these                                                     425          discontinued certificates          (b)   In cases where certificates are  discontinued          before  or  after  the  stipulated  term  but   the          depositors obtain refund only upon maturity of  the          certificates   such   refund  shall  be   made   to          depositors with  compound interest at the rate 8  %          per annum without any deduction whatsoever.          (c)   Since  no payment will be  made  against  the          discontinued certificates to the depositors in such          cases  shall be permitted to take loan, if they  so          intend,    against    the   payment    made    till          discontinuance of such terms and conditions as  the          company may stipulate."      The  Reserve  bank of India aggrieved against  all  the above  orders of the Calcutta High Court has  filed  appeals against  the  orders dated 23 rd March, 1990.  31st  August, 1990,  20th  December, 1990 and 24th  December,  1990.   The Peerless  General Finance and Investment Company  Ltd.,  has also  filed a writ petition No. 677 of 1991 directly  before this Court under Article 32 of the Constitution of India.      In  view of the fact that the questions raised  in  the appeals  filed  by  the Reserve Bank of  India  against  the orders  of  the High Court and in the  civil  writ  petition filed  by  the Peerless Company are common,  the  same  were heard  together  and  are disposed of  by  a  single  order. Interlocutory applications were also filed on behalf of  the employees  of  the  Peerless  Company,  agents  of  Peerless

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Company working in the field, and some of the depositors  in the Peerless company.  We have heard them also.      The  main controversy centers round paragraphs (6)  and (12)  of  the directions of 1987 and as such  the  same  are reproduced in full.      Paragraph (6) Security for depositors      On and from 15th May 1987-          (1)  Every  residuary  non-banking  company   shall          deposit  and keep deposited in fixed deposits  with          public sector banks or invest and keep invested  in          unencumbered  approved securities (Such  securities          being  valued  at their marked value for  the  time          being),  or  in  other investments,  which  in  the          opinion of the company are safe, a sum which  shall          not, at the close of business on 31st December 1987          and  thereafter at the end of each half  year  that          is,  30th June and 31st December be less  than  the          aggregate   amounts  of  the  liabilities  to   the          depositors whether or not such amounts have  become          payable:                                                       426      Provided that of the sum so deposited or invested          (a)  not  less than ten percent shall be  in  fixed          deposits with any of the public sector banks.          (b) not less than 70 percent shall be in unapproved          securities;          (c)  not more than 20 percent or ten times the  net          owned  funds  of the company, whichever  amount  is          less, shall be in other investments, provided  that          such investments shall be with the approval of  the          Board of Directors of the Company.      Explanation :          "Net  owned funds" shall mean the aggregate of  the          paid-up  capital and free reserves as appearing  in          the latest audited balance sheet of the company  as          reduced  by  the amount of accumulated  balance  of          loss,   deferred  revenue  expenditure  and   other          intangible assets, if any, as disclosed in the said          balance sheet.          (2)  Every  residuary  non-banking  company   shall          entrust   to  one  of  the  public   sector   banks          designated in that behalf, deposits and  securities          referred  to in clauses (a) and (b) of the  proviso          to  subparagraph (1) to be held by such  designated          bank  for  the  benefit of  the  depositors.   Such          securities  and deposits shall not be withdrawn  by          the  residuary  non-banking company,  or  otherwise          dealt with, except for repayment to the depositors.          (3)  Every  residuary  non-banking  company   shall          furnish to the Reserve Bank within thirty days from          the  close of business on 31st  December  1987  and          thereafter at the end of each half year that is  as          on 30th June and 31st December, a certificate  from          its  auditiors,  being  members  of  Institute   of          Chartered  Accountants,  to  the  effect  that  the          amounts   deposited  in  fixed  deposits  and   the          investments  made are not less than  the  aggregate          amounts  of  liabilities to the depositors  as   on          30th June and 31st December of that year.          Explanation :          For the purpose of this paragraph,          (a)  "Aggregate amounts of liabilities" shall  mean          total  amount  of deposits received  together  with          interest, premium, bo-                                                        427

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        nus  or  other advantage by  whatever  name  called          accrued on the amount of deposits according to  the          terms of contract.          (b) "approved securities" means; the securities  in          which  the  Trustee is authorised to  invest  trust          money  by  any law for the time being in  force  in          India  and bonds or fixed deposits issued  by   any          corporation  established  or constitued  under  any          Central or State enactments.          (c) "public sector banks" means, the State Bank  of          India, the Subsidiary Banks and  the  corresponding          new  banks  referred  to in Section  45(1)  of  the          Reserve Bank of India Act. 1934 (2 of 1934).          (d)   "unencumbered  approved   securities"   shall          include  the  approved  securities  lodged  by  the          company  with another institution for  advances  or          any  other  credit arrangements to  the  extent  to          which  such securities have not been drawn  against          or availed of.      Paragraph  (12)  Every  residuary  non-banking  company shall  disclose as liabilities in its books of accounts  and balance  sheets  the  total  amount  of  deposits   received together  with interest, bonus, premium or other  advantage, accrued or payable to the depositors.      We would first deal with the legal objections raised on behalf  of  the Peerless and other companies.  It  has  been submitted on behalf of the Peerless and other companies that the  directions of 1987 are ultra vires of Section  45J  and 45K of the Reseve Bank of India Act, 1934. None of the  said sections authorises the Reserve Bank to frame any directions prescribing the manner of investment of deposits received or the  method of accountancy to be followed or the  manner  in which  its  balance-sheet and books of accounts  are  to  be drawn  up.   It has been contended that Section 45J  has  no manner of application in the present case.  Section 45K  (3) of  the Act on which reliance has been placed on  behalf  of the Reserve Bank, merely provides that the Reserve Bank may, if  it considers necessary in the public interest so to  do, give directions to non-banking institutions either generally or to any non-banking institutions in particular, in respect of  any  matters relating to or connected with  receipts  of deposits,  including  the rate of interest payable  on  such deposits  and  the  purpose  for  which  deposits  will   be received.   According  so Sec. 45K (4)  if  any  non-banking institution fails to comply with any direction given by  the bank under sub-                                                      428 s.  (3)  the  Reserve Bank may prohibit  the  acceptance  of deposits  by  that  non-banking  institution.   It  is  thus submitted  that  on  a plain reading of  Sec.  45K  (3)  the Reserve  Bank  is  only competent to  frame  the  directions regarding  receipt of deposits and such power  of  direction does  not extend to providing the manner in  which  deposits can  be invested or the manner in which the liabilities  are to be disclosed in the balance-sheet or books of accounts of the  company. It is further submitted that the  power  under subs.  (4) is to prohibit acceptance of deposits and as such the  permissible  field of direction making  is  limited  to receipt  of deposits and nothing more.  The Reserve Bank  of India  in  framing  the  directions  of  1987  which  is   a subordinate  piece of legislation has  clearly  over-stepped the bounds of the parent statue of Sec. 45K (3) of the Act.      It  is  further  argued that the  Reserve  bank  cannot contend  that paragraphs 6 and 12 of the directions of  1987 are covered within the powers conferred on the Reserve  Bank

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under Sec. 45L (1) (b) of the Act. It is  submitted that the Reserve  Bank  had  at   no  point  of  time  expressed  its intention to invoke its powers under Sec. 45L.  Even  before the  Division Bench of the Calcutta High Court  the  Reserve Bank  did  not rely on Sec.  45L as alleged  source  of  its power to issue the impugned directions nor the Reserve  Bank referred to Sec. 45L in its pleadings before the High Court. Wherever  the  Reserve Bank of India wanted  to  invoke  its power  under Sec 45L of the Act, it has expressly  mentioned that  it was exercising its powers under Sec. 45L.   In  the case  of  non-banking  financial  companies  (Reserve  Bank) directions 1977, or the miscellaneous non-banking  companies (Reserve  Bank) Directions, 1977 it has expressly said  that it  was  invoking  its powers under sec.  45L  of  the  Act, whereas in the case of the impugned directions, the  Reserve Bank  has only referred to sections 45J and 45K of the  Act. The  Reserve  Bank of India itself in  the  affidavit  filed before the High Court had stated that the directions of 1987 were framed after careful deliberations at the highest level and  now  it cannot take the stand that the  source  of  its power in framing the impugned directions was exercised under sec  45L of the Act.  It is further contended that in  order to  invoke  the powers under sec 45L of the Act  it  has  to state that the Reserve Bank was satisfied for the purpose of enabling it to regulate the credit system of the country  to its advantage and it was necessary to give such institutions directions relating to the conduct of business by  financial institution  or  institutions.   In order  to  exercise  its powers  under sec. 45L of the Act, it has to apply its  mind for  the  purpose  of arriving at  the  statutorily required satisfaction.  In fact, such recital is necessary since such satisfaction  is  a pre-conditions for the Reserve  Bank  to exercise its powers under section 45L of the Act.      On  the other hand it has been contended on  behalf  of the Reserve                                                        429 Bank that the power of the Reserve Bank to regulate  deposit acceptance   activities   of   non-banking   and   financial institutions  under  Chapter  IIIB  of  the  Act  cannot  be disputed.  The Reserve Bank has power to issue the  impugned directions  under Section 45J, 45K and 45L of the Act.   The pith and substance of Para 6 of the directions of 1987 is to ensure  that deposits received from the public are  invested in  a  manner to secure the repayment of  the  deposits.   A deposit  is, by definition, a sum of money received  with  a corresponding  obligation  to  repay the  same.   Thus,  the repayment  of  the  deposit  is  an  integral  part  of  the transaction  of a receipt of deposit.  It is contended  that the  expression  "receipt  of  deposit"  must  be  construed liberally,  in the light of the nature of the provisions  as well  as  in  the light of the wide  language  used  in  the provision.   It  is also argued that even  if  the  impugned directions  of  1987  are  not  covered  under  the   powers conferred  under Sections 45J and 45K of the Act, those  are squarely covered by Section 45L of the Act.  It is submitted that various provisions under the Act are enabling in nature and confer overlapping powers.  Even if there is no  recital of  Sec. 45L, it would not be of much consequence,  if  such exercise of power can be related to Sec. 45L of the Act.      We  have considered the arguments advanced  by  learned counsel   for  the  parties.   Chapter  IIIB   laying   down provisions  relating to non-banking  institutions  receiving deposits  and  financial institutions was  inserted  in  the Reserve Bank of India Act, 1934, by virtue of Act 55 of 1963 w.e.f.  1.2.1964.  Section 45J, 45K (3) & (4) and 45L 1  (b)

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relevant for our purpose are given as under :      Sec. 45J          "The  Bank  may, if it considers necessary  in  the          public  interest  so to do, by general  or  special          order, -          (a)  regulate  or prohibit the issue  by  any  non-          banking   institution   of   any   prospectus    or          advertisement soliciting deposits of money from the          public; and          (b)  specify  the conditions subject to  which  any          such   prospectus   or   advertisement,    if   not          prohibited, may be issued.      Section 45K      (1) ..........      (2) ..........      (3)  The  Bank may, if it considers  necessary  in  the public  interest  so to do, give  direction  to  non-banking institutions either generally or to any                                                       430 non-banking institution or group of non-banking institutions in  particular,  in respect of any matters  relating  to  or connected with the receipt of deposits, including the  rates of  interest payable on such deposits, and the  periods  for which deposits may be received.      (4) If any non-banking institution fails to comply with any  direction given by the Bank under sub-section (3),  the Bank  may  prohibit the acceptance of deposits by  that non- banking institution.      Section  45L (1) If the bank is satisfied that for  the purpose of enabling it to regulate the credit system of  the country to its advantage it is necessary so to do; it may-          (a) ..........          (b)  give to such institutions either generally  or          to  any such institution in particular,  directions          relating  to the conduct of business by them or  by          it as financial institutions or institution.      A combined reading of the above provisions unmistakably goes to show that the Reserve Bank if considers necessary in the  public  interest so to do can  specify  the  conditions subject to which any prospectus or advertisement  soliciting deposits  of  money from the public may be issued.   It  can also give directions to non-banking institutions in  respect of  any matters relating to or connected with the receipt of deposits,  including the rates of interest payable  on  such deposits,  and  the  periods  for  which  deposits  may   be received.   This latter power flows from sub-s. (3) of  Sec. 45K  of  the Act.  The Bank under this  provision  can  give directions  in  respect  of  any  matters  relating  to   or connected with the receipt of deposits (emphasis added).  In our  view a very wide power is given to the Reserve Bank  of India to issue directions in respect of any matters relating to or connected with the receipt of deposits.  It cannot  be considered  as a power  restricted or limited to receipt  of deposits  as sought to be argued on behalf of the  companies that  under  this  power  the Reserve  Bank  would  only  be competent  to  stipulate that deposits  cannot  be  received beyond  a certain limit or that the receipt of deposits  may be   linked   with  the  capital  of  the   company.    Such interpretation  would be violating the language of Sec.  45K (3) which furnishes a wide power to the Reserve Bank to give any  directions  in respect of any matters  relating  to  or connected  with the receipt of deposits.  The  Reserve  Bank under  this  provision is entitled to give  directions  with regard  to  the  manner  in which the  deposits  are  to  be invested  and also the manner in which such deposits are  to

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be  disclosed in the balance-sheet or books of  accounts  of the company. The word ‘any’ quali-                                                        431 fying  matters relating to or connected with the receipt  of deposits in the above provision is of great significance and in  our  view  the impugned directions  of  1987  are  fully covered under Sec. 45K (3) of the Act, which gives power  to the Reserve Bank to issue such directions.  As a proposition of  law we agree with the contention of the learned  counsel for  the  Reserve Bank that when an authority  takes  action which  is  within its competence, it cannot be  held  to  be invalid  merely  because it purports to to be made  under  a wrong  provision, if it can be shown to be within its  power under  any other provision.  Learned counsel in this  regard has  placed  reliance on Indian Aluminium  Company  etc.  v. Kerala State Electricity Board, [1976] 1 S.C.R. 70.      In our view as already held above, the Reserve Bank was competent and authorised to issue the impugned directions of 1987, in exercise of powers conferred under Section 45K  (3) of the Act.      Having  cleared the ground of ultra vires we  must  now turn  to the main challenge posed on behalf on the  Peerless and other companies and employees.      Mr.  Harish Salve made the leading arguments on  behalf of  the  Reserve  Bank of India.  His  main  thrust  of  the argument was that the Reserve Bank of India had issued these directions  of 1987 in order to carry out observations  made by  this  Court in Peerless case (supra) and in  the  public interest of safeguarding the money of the depositors in such companies.   The Reserve Bank considered it  necessary  that the interest of millions of small depositors of rural  areas should be made safe and may not be devoured by a mushroom of companies with no stake.  According to Mr. Salve it was  not the  intention of the Reserve Bank to put  any  restrictions in  the  manner or conduct of business to be  done  by  such companies.   But the most important factor weighing  in  the mind  of the Reserve Bank was to safeguard the money of  the depositors.   It was not the concern of the Reserve Bank  as to  how  and in what manner these companies  would  regulate their expenses or would be able to conduct such business for earning  more  profits.  According to the  Reserve  Bank  of India these companies cannot be allowed to spend a mighty of deposits  for meeting their own expenses.  They should  find out their own resources for meeting the expenses.  According to the Reserve Bank the rate of interest to be paid by these companies  to the depositors has been fixed as 10  per  cent per  annum.  They could easily invest such amount  in  bonds issued by public sector corporation and earn interest at the rate  of  14 per cent per annum or more and thereby  earn  a profit of 4 per cent and regulate their expenses within  the limits   of  such  profits.   It  was  submitted  that   the propensity of the                                                        432 problem has increased manifold in view of the fact that  the amount  of deposits and investments has gone  to  staggering heights worth several thousand crores of lower middle  class persons  living  mostly  in the rural  areas.   A  bogey  of employment hazards of several thousand regular employees and still  a large number of agents working in the field  cannot deter the Reserve Bank to lay down some directions which may act  harshly and resulting in lessening of profits  of  such companies.   It  was also submitted that  according  to  the affidavit  submitted before this Hon’ble Court on behalf  of the  Reserve Bank of India it has been stated that prior  to 1987  directions, there were 747 such companies  which  were

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conducting  deposit scheme.  At present they could  classify only   392  such  companies  as  required  information   for classifying   of  the  remaining  companies  had  not   been received.  Most of such companies have not designated  their banks  as it required under paragraph (6) of the  directions and in most of such cases amounts invested in bank  deposits and   approved  securities  fall  much  short   of   deposit liabilities.  The companies operating in these areas also at times  become  untraceable in that a number  of  show  cause notices  issued have been returned as "addressee not  known" etc.   In  some cases those who have chosen  to  reply  have given  evasive replies.  It has been further stated  in  the affidavit  that most of these companies did not comply  with the financial discipline sought to be imposed upon them  and have avoided and abhorred any scrutiny into their accounts.      It  has  thus  been submitted that to  get  over  these difficulties,   the directions of 1987 attempt to provide  a steady, stable identificable and monitorable method by which the  companies  will  be able to  disclose  all  their  true liabilities  and  also  utilise the money  raised  from  the depositors   for  investment  in  safe   indentifiable   and quantifiable  securities instead of investing them in  other ventures.   This  will  ensure  complete  security  to   the depositors  at all times and will also make the accounts  of the companies comprehensible and easy to monitor. As regards the  formula  laid  down  by the  High  Court  it  has  been submitted that if a variable as against a fixed and definite percentage  of investment with respect to amounts  collected by  way  of  each  instalment  is  permitted  it  would   be impossible  to  find  out and  verify  whether  the  amounts invested are in accordance with the directions at any  given point of time when there are thousands of certificates  with different   and   varying   maturity   periods.    In    the circumstances,  the formula laid down by the High  Court  is self-defeating  and  also  deprives  the  depositor  of  the security envisaged under the directions.      It  was  also submitted on behalf of the  Reserve  Bank that  it is an admitted position that the business of  RNBCs is  to collect funds from the public and invest the same  in Government securities and bank deposits.  In                                                        433 the  application forms and in the advertisement’s issued  by these companies it is expressly held out to the public  that their  moneys  are  safe with the banks  and  in  Government securities.   It is the very nature of their business  which makes it non-viable if they are to give fair  return to  the depositors  and private security for the repayment of  their money.  The scheme of control as provided in the  directions of  1987 might be harsh but the same is in  conformity  with the assertions held out by these companies to the public  at large.   These  directions subject the companies  to  proper discipline  by monitoring their actions and such  directions cannot be considered as unreasonable.  The reasonableness of the directions when looked at from the point of view of  the depositors  for  whose safeguard they have been  issued,  is beyond  question.   Return provided and the security  to  be given  through  proper investment cannot be faulted  on  any ground.   Thus what seems to be an impossible situation  for these  companies is not due to the impugned  directions  but because  of  the nature of business itself.  The  funds  are collected  at  exhorbitant  costs and  on  that  account  it becomes difficult for the companies to give a fair return to the depositors.  These companies are not genuine  investment companies.   If they want to do genuine investment  business they  can do so by choosing freely their investment, but  in

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that  case  Reserve Bank of India directions  applicable  to such  companies  would permit them to  accept  deposits  not exceeding  25 per cent of paid up capital and reserve.   The directions  of 1987 had not imposed any restriction  on  the right to carry on business but those directions only place a restriction  with  respect to one of the  modes  of  raising reserves i.e. through public deposits.      It  has been further argued that the reasonableness  of the  directions has not to be looked into from the point  of view  of the company to whom any such restrictions  will  be irksome and may therefore be regarded as unreasonable.   The framing  of  the directions are only  regulatory  in  nature keeping  in  view  the interest of  the  depositors  without unduly jeopardising the interest of the employees.   Keeping this  in mind it has been provided that the  minimum  return would  be at 10 per cent, though there are govt. and  public sector bonds which pay interest at a much higher rate.  Even presently  bank  deposits and other  company  deposits  give return  varying  between  13 to 15 per cent.   There  is  no limitation on the quantum of deposits with reference to  the overall  capital as shown in the case of companies  governed by  the Companies (Acceptance of Deposits) Rules  1975,  Non Banking Financial Companies (Reserve Bank) Directions, 1977. The linking of deposits with capital as in the case of other regulations  is  a  measure to secure the  interest  of  the depositors  namely  e.g. Companies (Acceptance  of  Deposit) Rules, 1975, ensure that the assets                                                      434 are at least three times the deposits received.  In view  of the  low or total non-existent capital of the RNBCs, it  was not  possible  to  secure  the  deposits  in  this   manner. Instead,  it  has been provided that  the  entire  liability towards the depositors should be invested and no part of the deposits  be  utilised for payment of  commission  etc.   or incurring  other  expense.   In  any  event,  even  if,  the directions  do not prescribe existence of owners capital  as security,  it does not imply that it is permissible  to  use the deposits received to bridge the time gap between  income and expenditure.  Merely because the directions do not fix a ceiling  on the rate of commissions it does not  imply  that the  Reserve Bank has granted its permission to  payment  of high commission or incurring of large expenses on management etc. The RNBCs are free to incur such expenses and  organize their business as they desire as long as the depositors  are fully  secured  at  all  times.   The  contention  that  the business  of the RNBCs will close down if the directions  of 1987  are  to  be  adhered to is  not  based  on  facts  and misconceived  in  law.  A perusal of  Directors’  Report  of Peerless  for  the years 1988, 1989 and 1990 clearly  go  to show that they did not consider the company in any financial difficulty  and  in fact paid larger  dividends  even  after complying with the impugned directions of 1987.      It  has thus been submitted that given a wide  latitude in judging the validity of economic legislation on the touch stone   of   reasonableness,  in  the  absence   of   patent arbitrariness  but  having nexus with the  public  objective sought to be attained, the durations cannot be condemned  as being  violative  of Article 19(1) (g).  The result  of  the contentions put forward on behalf of RNBCs would be that  in the  case of endowments repayable after, say 10 years, there will be nothing due and payable in the first nine years  and as such there would be no need of investing any sums for the first   nine  years.   The  interpretation  placed  by   the respondent companies upon the judgment of the High Court  is that it  is now open to them to determine as per  their  own

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peculiar  estimate,  what would be sufficient  to  meet  the liabilities towards the deposits and accordingly such amount would  be  their "aggregate liability".   According  to  the Peerless  Company  if it deposits 75 per cent of  the  first year’s subscription, it is adequate to cover its liabilities to the depositors.  On the other hand  as per Timex  Company a  deposit  of  only  50  per  cent  of  the  first   year’s subscription  would be adequate to cover its liabilities  to the depositors.  Whereas the Favourite Company contends that investment  of 40 per cent of the first year’s  subscription will be adequate to cover the liabilities to the depositors. It  has  been  submitted that  according  to  well  accepted accounting  practice where any sum is received as a loan  or as a deposit it has to be shown as a liability together with accrued interest irrespective of when it is due.  The amount contributed  by the depositors being a capital  receipt  and not  a  revenue receipt cannot under  any  circumstances  be shown in the                                                        435 balance  sheet otherwise then at its full value.   Moreover, being a capital receipt, it cannot be credited to the profit and  loss  accounts  since Part II of  Schedule  VI  to  the Companies Act, 1956 requires that the amounts to be shown in the  profit  and  loss accounts should be  confined  to  the income  and expenditure of the company.  Thus,  crediting  a part of the first and subsequent year’s deposit  instalments to the profit and loss account and not showing them fully as a  liability in the balance sheet would  be a  contravention of the provisions of the Companies Act.      It has been further submitted on behalf of the  Reserve Bank  that  the question which arises for  consideration  is whether liability to the depositors can be calculated on  an actuarial  basis.  It may be noted that actuarial  basis  is normally  adopted  (a)  in respect of items  of  income  and expenditure,  (b)  where there is a significant  element  of uncertainty.   Thus, in so far as the liability arising  out of the repayment to the depositors of the amount capitalised by him is considered, the actuarial basis cannot be  adopted and this liability must always be stated at its full  value. The principle of actuarial valuation is in opposite for  the business  of  RNBCs.  It has also been  submitted  that  the formula  laid  down by the High Court about the  quantum  of investments to be made by RNBCs is incapable of  effectively monitoring  and hence the provisions made in the  directions of  1987 regarding security to depositors would be  rendered wholly  illusory.  Such impossibility in the monitoring  has been demonstrated as follows:          (A)  These  companies  do not fix  a  definite  but          variable  percentage of investment with respect  to          amounts  collected by way of each instalment  under          the  certificates of deposits; e.g. Peerless  would          invest  75  % of the collections made  out  of  1st          instalment  (retaining and taking to P & L A/c,  25          %)  and 82 % out of 2nd instalment and so  on.   At          any given point of time, there will be thousands of          deposit certificates with varying maturity and  the          amounts collected would be an impossibility to find          out and verify whether the amounts invested are  in          accordance,  with  the  proportion  fixed  by   the          companies   with   respect  to   each   instalment.          Regulatory authority would have to depend  entirely          on   these  companies  for  doing  its   monitoring          exercise.          (B)   Each  company  fixes its  own  proportion  of          investment with respect to each instalment based on

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        the  projected  yield  from  its  investment;  e.g.          Favourite Finance Company claims that it needed  to          invest only 40 % of the amounts collected by way of          1st  instalment claiming that the  projected  yield          from  its investment would be 14.8 %.   This  would          compound the impossibility of monitoring further.                                                       436      It  has thus been argued that the formula laid down  by the  High court is self-defeating and  depriving  altogether benefits  of security provisions given to  depositors  under the directions of 1987.      Mr. Somnat Chatterjee, learned senior counsel appearing on  behalf of Peerless Company contended that  the  Peerless being the largest RNBC in india having an impeccable  record of  public service decided to give effect to the  directions of 1987 as it wanted to avoid any confrontation with Reserve Bank  and  further not to give an impression of  seeking  to avoid  "regulatory control", tried its best to  comply  with the  said directions w.e.f. 15th May, 1987 till 31st  March, 1989.   However,  from  its  working  results  it   appeared bonafide  to the Board of Directors of Peerless that it  was impossible  to  carry on its traditional  business  for  any longer period without incurring huge losses.  The company as such  decided to approach the High Court for  obtaining  the benefit  of  judgment  delivered in  the  Timex  case.   The Peerless  has only challenged a part of Paragraph 6  of  the directions of 1987 and the consequential direction contained in para 12 which shows that Peerless does not wish to remain outside  of  the  regulatory controls of  Reserve  Bank  but challenges  only  those directions which make  the  business totally  unworkable.  There has been no attempt on the  part of  Peerless to carry on its business in a manner which  may jeopardize  the interest of any depositor or which will  not protect  fully  every paisa deposited with Peerless  at  all points of time.  No real complaint was made by or on  behalf of  Reserve Bank as to any depositor of Peerless  running  a risk  of loss of any amount or that it has carried on or  is carrying  on the business in an undesirable manner.  It  has been  submitted that Peerless should not be made  to  suffer for the illegality or improprieties, if any committed by any other RNBC and neither Peerless nor its 14 lac field agents, 3  thousand  field officers and 4 thousand direct  employees should   be  made  to  suffer.   The  result  of   following directions  of  1987  would be that all  the  above  agents, officers  and  employees of the Peerless could  loose  their jobs and their family members will be thrown on the streets. The  Peerless had abolished the provision of  forfeiture  in all  its schemes as early as in 1986 that is even  prior  to coming  into force of the directions of 1987.  The  Peerless has  been compelled to challenge paragraphs 6 and 12 of  the directions  of  1987 since enforcement of  these  provisions would result in complete annihilation of the undertaking  of Peerless in the near future.      It  was  further contended that it is inherent  in  the business carried on by Peerless and other similar RNBCs that the  working capital is generated out of  the  subscriptions received  from  the  certificate  holders.   Such   business comprises in collecting subscriptions from depositors either in lumpsum                                                        437 or  in instalments and such deposits are paid back with  the guaranteed accretions, bonus, interest etc. in terms of  the contract  at the end of the stipulated term.   Through  this business such companies have rendered great and  commendable service to the nation in mobilizing small savings and giving

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a boost to the movement of capital formation in the country. Such  companies have placed at the disposal of  Governmental institutions   including  public  sector  banks  and   other financial  institutions  huge deposits which  could  not  be collected  by the said financial institutions themselves  or by anybody in the organised sector.  The method followed  by the companies in carrying on the aforesaid business is  that a  certain  portion of the subscriptions received by  it  is transferred to the profit and loss account shown as  income, and  the same is used to defray inevitable  working  capital requirements  of  the company, namely,  payment  of  agent’s commission,  management expenses, staff salaries  and  other overheads.   However,  the  balance  of   the  subscriptions (excluding  the appropriated part) is transferred to a  fund each year and the corpus of the fund  is invested in turn in interest bearing investment.  The Peerless company initially used  to  transfer approximately 95 % of  the  first  year’s subscriptions  to  the profit and loss account and  used  to invest  the  subscriptions  received from  the  second  year onwards.  However, at present, Peerless is appropriating  25 %  of the first year’s subscription to the profit  and  loss account  and  investing the balance 75 % in the  manner  and mode  prescribed by paragraph 6 of the directions  of  1987. It has been contended that the investment is planned in such a  manner  that at the end of the  contractually  stipulated maturity  period or at any other point of time when any  sum of money may become contractually payable to a depositor, an RNBC is always in a position to pay all its conractual  dues to  the certificate holder.  There is thus no threat to  the safety  of  the depositors money inspite  of  the  aforesaid transfer  of a portion of the subscription received  to  the profit  and loss account showing it as income and  utilising it  for  meeting the working capital requirements.   It  was pointed out that Peerless had been assessed to income on the basis  of  above method of accounting and no  objection  has ever  been  taken  by  the revenue  authorities  or  by  the auditors  of Peerless or even by R.B.I. before the  issuance of  the  directions  of 1987.  It  was  submitted  that  the Peerless  was incorporated in the year 1932 when it used  to carry  on life insurance business.  It changed over  to  the present  form  of business from 1956 and since then  it  has been  carrying on such business with the full  knowledge  of R.B.I.  as well as other concerned authorities.  The  R.B.I. never  objected  to the accounting system  followed  by  the Peerless.  In view of the abolition of the forfeiture clause the  alleged risk to the depositors has become totally  non- existent.   It  was further argued that  the  R.B.I.  framed regulatory  measures in 1973 such miscellaneous  non-banking companies (Reserve Bank) Directions, 1973.                                                       438 The  Reserve  Bank granted exception to  Peerless  from  the provisions of the said Directions of 1973, by an order dated 3rd December, 1973.  The Favourite Small Investments Limited filed  a  writ petition challenging the refusal  of  Reserve Bank  to grant exemption to them from the provisions of  the said   1973  Directions  to  granting  such   exemption   to Peerless.   In the said writ  petition the R.B.I.  filed  an affidavit  justifying the denial of exemption  to  Favourite Small  Investments  Ltd.   and in  the  aforesaid  affidavit submitted  in  detail the accounting procedure  of  Peerless including the fact that Peerless was transferring  a portion of  the  subscriptions  to the profit and  loss  account  as income  and  it also certified that the said  method  was  a permissible business method and by following the said method Peerless would be in a position to pay all contractual  dues

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of  the  certificate  holders at the  end  of  the  maturity period.  Thus the said system of accounting which is  called an actuarial system of accounting was found satisfactory  by the R.B.I.  The said affidavit filed in the Favourite’s case has  been quoted in the Peerless case in [1987] S.C.C.  424, and the said actuarial system of accounting was not held  as impermissible   or   against  any   recognized   method   of accounting.      It  was also contended on behalf of the  Peerless  that the  interest  of  depositors  is  certainly  an   important consideration  but  the interest of the  depositors  is  not impaired   in  any  manner  whatsoever  by  the  method   of accountancy  now being followed by Peerless and in  fact  by all  similar companies, namely, appropriation of a  part  of the subscription to the profit and loss account and  meeting the  working  capital  requirements out  of  the  same.   In respect  of  the above contention certain charts  were  also produced during the course of arguments and from such charts it  was  sought to establish that except for the  first  two years  the principal amount paid by a subscriber  is  always covered  by  matching investment.  Further, on the  date  on which  a deposit becomes contractually repayable,  there  is full coverage of such liability.      It was submitted on behalf of All India Peerless  Field Officers  Association that the said  association  represents about  14  lac  field workers.  These  14  lac  persons  are engaged by Peerless on the basis of individual contracts  of engagements  and earn their livelihood solely by  collecting business   for  Peerless.   For  collecting  such   business Peerless  pays  to them commission at a  contractual  agreed percentage  on  the value of business collected.   The  said field officers have to meet all expenses for procuring  such business  such  as travelling expenses,  boarding,  lodging, office  and  administrative  expenses  etc.   out  of   such commission.  Field officers have to undertake long tours and have  to  travel  into remote villages to  reach  the  small depositors.   It has been submitted that if  the  directions of  1987 are upheld, the undertaking of Peerless  will  face inevitable closure and almost                                                        439 14  lac  field  officers  will lose  their  only  source  of livelihood and will be virtually thrown on the streets.  The field  officers and their families will face starvation  and extreme  penury in case the validity of such  directions  is upheld.  Thus any restriction which would be prohibitive  or which would result in closure of the undertaking of Peerless would be against public interest.      We have heard the arguments of learned counsel for  the parties.  It may be made clear at the outset that  questions raised in these cases  regarding the validity of  paragraphs 6  and  12 of the directions of 1987  cannot  be  determined merely  by  taking  into consideration the  working  of  the financial  soundness of the one company alone  like  Peerles but the  matter has to be examined in a broader  perspective of  all RNBCs.  We have to keep in mind, while deciding  the controversies raised in the arguments, such RNBCs which  are doing  the  same  kind of business of  taking  deposits  and returning the same to the certificate holders after a gap of 7  to  10  years along with interest,  bonus  etc.   In  the affidavit  submitted before this Court on behalf of  Reserve Bank  of  India  it  has been  stated  that  prior  to  1987 directions,  there  were  747  such  companies  which   were conducting this business under various deposit schemes.   At present  they could classify 392 such companies spread  over across   the  entire  country.   According  to   the   above

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affidavit, as on 31st March, 1990 in the eastern zone out of 185 companies, only 35 have filed the annual returns and out of  which only 30 have filed the balance sheet.   Similarly, out of 140 companies in the northern zone only 28 have filed annual  returns and 32 have filed balance sheet.  A  perusal of the returns given by 51 of these companies discloses that 35  companies have a negative net worth (i.e.  their  losses far   exceed  their  share  capital  and   reserves)   which necessarily  means  that they have not only  wiped  out  the share capital and reserves but their liabilities are far  in excess.   Only  16  companies  have  a  positive  net  worth including Peerless.  It has been further pointed out in  the affidavit  that  apart from Peerless the  aggregate  capital investment by 15 companies is Rs. 158 lacs only.  As against this, the negative net worth of the 35 companies  aggregated to  Rs.  3.6 crores.  Despite large accumulated  losses  (in some  cases with meager or nominal capital) these  companies apart  from Peerless, have realised deposits to the tune  of Rs. 86 crores.  Apart from the financial parameters most  of these  small  companies are family concerns.  Most  of  such companies  have  not designated their banks as  is  required under  Paragraph  6 of the directions and in  most  of  such cases  amounts  deposited in banks and  approved  securities fall  much short of deposit liabilities.  It has  also  been pointed out in the affidavit that the companies operating in these  areas  also  at times become untraceable  in  that  a number  of show  cause notices issued have been returned  as "ad-                                                        440 dressee  not known" etc.  Thus we have to keep in  mind  the above mushroom of companies also which have set foot in this sort of business.      It  would  also be important to note that most  of  the depositors  in such companies belong to the rural areas  and who  are  persons  belonging to lower  middle  class,  small agriculturists  and  small traders, pensioners  etc.   These companies  advertise  their  schemes  widely  in   beguiling terms.   Through  such advertisements they  lure  the  small savings  of  the poor ignorant villagers through  a  special structure  of  agents, special agents,  different  kinds  of organisers  and so on.  The agents commission for the  first years  subscription is very high and which offers  incentive to   the  agents  on  securing  a  fresh  business   and   a disincentive  to collect subscriptions of subsequent  years. It is a matter of common experience and knowledge that  most rural folk particularly those belonging to the lower  strata of society will not pay their subscriptions regularly unless somebody takes the trouble of collecting their  subscription with  the same enthusiasm as may be shown in  enrolling  the subscribers  in the beginning.  It is no doubt correct  that these  companies do tap and collect the deposits  from  such areas  where  the agents of public sector  banks  or  public sector  companies  or  instrumentalities of  the  state  are unable to reach.  Thus these companies mop up a large amount of  money for ultimately investing in the nationalised  bank or  other Govt.  owned corporations or companies.   However, the  Reserve Bank considered the safety of the money of  the depositors  as  the paramount consideration in  issuing  the direction of 1987.  It cannot be disputed that the  interest of  the employees as well as the field officers  and  agents have also to be taken into consideration while deciding  the reasonableness  of  the  impugned  directions.   It  may  be further noted that in the Reserve Bank of India  v. Peerless Company   case  (supra)  this  Court  though  came  to   the conclusion  that  the Endowment Certificate  Scheme  of  the

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Peerless  company  was  outside the  Prize  Chit  and  Money Circulation  Schemes  (Banning) Act, still it  was  observed that it would be open to the Reserve Bank to take such steps as are open to them in law to regulate schemes such as those run  by  the  Peerless company to  prevent  exploitation  of ignorant  subscribers  though  care must also  be  taken  to protect  the  thousands of employees.  The  Court  expressed grave  concern  with  regard  to  the  mushroom  growth   of ‘financial investment companies’ offering staggeringly  high rates  of interests to depositors leading to  the  suspicion whether these companies are not speculative ventures floated to attract unwary and credulous investors and capture  their savings. It was clearly pointed out that if the Reserve Bank of  India  considers the Peerless company  with  800  crores invested  in Govt. securities, fixed deposits with  national banks etc. unsafe for depositors one wonders what they  have to say about the mushroom of non-banking companies which are accepting                                                        441 deposits  promising most unlikely returns and as  such  what action was proposed to be taken by the R.B.I. to protect the investors.   In the above background the Reserve  Bank  came forward with the impugned directions of 1987.      Before  examining the scope and effect of the  impugned paragraphs  6 and 12 of the directions of 1987, it  is  also important  to  note  that Reserve Bank  of  India  which  is bankers  bank  is  a  creature of  Statute.   It  had  large contingent  of expert advice relating to  matters  affecting the  economy of the entire country and nobody can doubt  the bonafides  of  the  Reserve Bank  in  issuing  the  impunged directions  of  1987.  The Reserve Bank plays  an  important role  in the economy and financial affairs of India and  one of its important functions is to regulate the banking system in  the  country.   It is the duty of the  Reserve  bank  to safeguard  the  economy  and  financial  stability  of   the country.  While examining the power conferred by Sec. 58A of the  Companies Act, 1956 on the Central Govt.  to  prescribe the  limits  upto  which,  the  manner  in  which  and   the conditions  subject  to  which deposits may  be  invited  or accepted by non banking companies, this Court in Delhi Cloth and  General Mills, etc. v. Union of India, etc.,  [1983]  3 S.C.R, 438 observed as under:          "Mischief was known and the regulatory measure  was          introduced to remedy the mischief.  The  conditions          which can be prescribed to effectuate this  purpose          must   a   fortiori,  to  be  valid,   fairly   and          reasonably,  relate  to  checkmate  the  abuse   of          juggling with the depositors/investors’ hard earned          money  by the corporate sector and to  confer  upon          them a measure of protection namely availability of          liquid  assets to meet the obligation of  repayment          of  deposit  which  is implicit  in  acceptance  of          deposit.   Can  it  be  said  that  the  conditions          prescribed  by the Deposit Rules are so  irrelevant          or  have no reasonable nexus to the objects  sought          to  be achieved as to be arbitrary?  The answer  is          emphatically in the negative.  Even at the cost  of          repetition,  it can be stated with confidence  that          the  rules which prescribed conditions  subject  to          which  deposits  can  be invited  and  accepted  do          operate  to extend a measure of protection  against          the  notorious  abuses  of economic  power  by  the          corporate    sector    to    the    detriment    of          depositors/investors,  a  segment  of  the  society          which  can be appropriately described as weaker  in

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        relation  to the mighty corporation.  One need  not          go   so   far   with  Ralph   Nadar   in   ‘America          Incorporated’    to   establish   that    political          institutions  may fail to arrest the  control  this          everwidening  power of corporations.  And  can  one          wish away the                                                        442          degree of sickness in private sector companies?  To          the  extent companies develop sickness,  in  direct          proportion the controllers of such companies become          healthy.    In   a  welfare  state,   it   is   the          constitutional obligation of the  state to  protect          socially  and economically weaker segments  of  the          society  against the exploitation by  corporations.          We  therefore, see no merit in the submission  that          the conditions prescribed bear no relevance to  the          object  or  the  purpose for which  the  power  was          conferred   under   Sec.   58A   on   the   Central          Government."      The  function  of  the  Court is  to  see  that  lawful authority is not abused but not to appropriate to itself the task entrusted to that authority.  It is well settled that a public  body invested with statutory powers must  take  care not  to exceed or abuse its power.  It must keep within  the limits  of  the authority committed to it.  It must  act  in good  faith and it must act reasonably.  Courts are  not  to interfere  with  economic policy which is  the  function  of experts.   It  is not the function of the Courts to  sit  in Judgment  over  matters  of  economic  policy  and  it  must necessarily be left to the  expert bodies.  In such  matters even  experts can seriously and doubtlessly differ.   Courts cannot  be expected to decide them without even the  aid  of experts.      The  main  grievance  raised on  behalf  of  respondent companies  is that if the provisions of paragraphs 6 and  12 of  the directions of 1987 are complied with, the  companies will be left without any fund to meet their working capital. It would be impossible to run the business without a working capital  and to meet even reasonable expenses  incurred  for payment of agents commission, management expenses and  other overhead expenses.  During the course of hearing the counsel for  the  companies had relied on some charts  to  show  the unworkability   and   unreasonableness   of   the   impugned paragraphs 6 and 12 of the directions.  It was also  pointed out  that the arguments made on behalf of the  Reserve  Bank overlooked the fact that in case of investments in long term schemes such as Indira Vikas Patra and Kisan Vikas Patra the companies  will not be able to utilise its return from  such investment  before the end of the minimum period  for  which these  schemes operate.  The respondent companies will  thus be left without any income during the period of operation of such   schemes   and  cannot  meet   its   working   capital requirements.  It has been submitted that the directions  of 1987  really  amount  to prohibition of the  business  in  a commercial  sense  without  reasonable basis  and  are  thus violative of Art. 19(1) (g) of the Constitution.  In support of the above contention reliance has been placed on Mohammad Yasin  v.  The Town Area Committee, Jalalabad  and  another, [1952] SCR 572; Premier Auto-                                                        443 mobiles  Ltd.  and anothers v. Union of India, AIR  1972  SC 1690 and on Shree Meenakshi Mills Ltd. v. Union of India AIR 1974 SC 366.  It has also been contended that it is now well settled  by  plethora of judicial  pronouncements  that  the restrictions  on any business caused by  regulations  should

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not be more than what would be necessary in the interest  of the   general  public  and  such  restrictions  should   not overreach   the  scope  of  the  objects  achieved  by   the regulations.      The  contention on behalf of the Reserve Bank  is  that the  directions  have  been  made  in  public  interest   of safeguarding the interest of millions of depositors and  the Reserve  Bank  is not concerned and while doing  so  it  was rightly  thought  necessary  by the Reserve  Bank  that  the companies  cannot be permitted to incur the expenses out  of the corpus of the depositors money.  The business carried on by  the  companies  to  restructure  their  organization  by curtailing  its expenses.  If such middlemen or brokers  are not  able  to  earn a large profit as was  done  before  the enforcement  of  the impugned directions, it lies  with  the companies  to continue or not such business when the  margin of  profit  is curtailed.  These companies want  to  do  the business  without  having  any  stake  of  their  own.   The companies  doing  such business cannot be subjected  to  the scheme  of  control  applied to  other  financial  and  non- financial  companies for the simple reason that they have no capital and their schemes are for a period much longer  than three  years.   After the decision of the Supreme  Court  in Peerless  case  these directions of 1987 were  issued  after mature consideration with the help and advice of experts.      Paragraph 6 of the impugned directions according to the Reserve   Bank   lays  down  provisions  for   security   of depositors.   it prescribes the mode of investment of  funds collected  by  the companies.  It cannot  be  disputed  that while collecting deposits the companies clearly hold out  to the  members of the public that the moneys so  collected  by them  shall  be invested in Government  securities  or  kept deposited with the banks and they also assure the depositors that their moneys are safe and secure.  On the basis of such representations  and  on  the strength  of  exaggerated  and misleading  advertisements  these  companies  collect   huge amounts  of deposits from a large number of small, poor  and uninformed depositors and that too in such investment spread over a long period.  The contention on behalf of the Reserve Bank  of India is that in the above context these  companies carry on their activities wholly with the funds provided  by the public by way of deposits and hardly have any capital of their  own.   In these circumstances it has  been  urged  on behalf  of  the  Reserve Bank that the  provisions  made  in paragraph 6 of, the impugned directions are abso-                                                      444 lutely   reasonable  and  are  for  ensuring  repayment   of deposits.  It has been submitted that it is common knowledge that  small  depositors cannot have recourse to  courts  for recovering  their amounts if the companies do not repay  the deposits.   The  direction in paragraph 6 enjoins  on  these companies  to deposit in fixed deposits with  public  sector banks  or  unencumbered  approved  securities  or  in  other investments, a sum which shall not, at the close of business on  31st  December, 1987 and thereafter at the end  of  each half year i.e. 30th June and 31st December not less than the aggregate  amounts  of  the liabilities  to  the  depositors whether  or  not  such amounts have  become  payable.   Thus according  to  the above provision whole  of  the  aggregate amounts of the liabilities to the depositors whether or  not such  amounts  have  become repayable,  is  required  to  be deposited  or invested.  10 % of such amount is required  to be  deposited  in public sector banks and 70 %  in  approved securities  and 20 % has been allowed to be invested by  the company according to its own choice.

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    In  order  to understand the rigour of  the  directions laid  down  in  paragraph  ‘6’, it  would  be  necessary  to understand the scope of other directions as well.  Paragraph 4 of the directions lays down that the deposit shall not  be accepted  for a period of less than 12 months or  more  than 120  months i.e. one years from the date of receipt of  such deposits.  The normal standard applied to non financial  and financial companies is that they cannot accept deposits  for a  period  of more than 36 months  (except  housing  finance company).  Thus the companies before us have been  permitted to  conduct  their schemes extending over to a  long  period upto  120  months.   This is a special  kind  of  concession provided to the companies of the kind before us.      Paragraph  5  of the directions relates to the  minimum rate of return fixed at 10 % per annum for a deposit with  a maturity  of 10 years.  It is a matter of  common  knowledge that   in   the  present  times  even  the   public   sector corporations and banks and other financial and non-financial companies  pay  interest at much more higher  rates  ranging from  14  to 18 %.  Thus according to the above  scheme  the respondent  companies and the others doing such business can easily  earn a profit of 4 to 5 % on their investments.   In case  of  a request of the depositors for repayment  of  the deposit  before  maturity  then the amount  payable  by  the company by way of interest etc., shall be 2 % less than what could  have  been ordinarily paid by the company by  way  of interest if the deposit had run the full contractual period. However, the question of repayment before maturity or  after how  many  years  will  depend entirely  on  the  terms  and conditions of the contract of such deposit.  Paragraph 12 of the directions of 1987 enjoins upon the company to  disclose as liabilities in its books of accounts and                                                        445 balance  sheets  the  total  amount  of  deposits   received together  with interest, bonus, premium or other  advantage, accrued  or payable to the depositors.  Under Clause (a)  to the  explanation  to clause 3 of  paragraph  ‘6’  "Aggregate Amounts of Liabilities" shall mean total amount of  deposits received  together  with interest, premium, bonus  or  other advantage by whatever name called, accrued on the amount  of deposits  according  to  the terms of  contract.   Thus  the company  is  required  to deposit or  invest  the  aggregate amounts  of its liabilities having accrued on the amount  of deposits according to the terms of contract.  Without  going into  the figures shown in the various charts, it  is  clear that  if the directions contained in paragraphs 6 and 12  of the directions of 1987 are to be carried out, the  companies are  not left to utilise any amount out of the  deposits  as working  capital  to  meet the expenses.  In  our  view  the Reserve  Bank  is right in taking the stand  that  if  these companies  want  to do their business,  they  should  invest their own working capital and find such resources  elsewhere with  which the Reserve Bank has no concern.  If we look  at the   Annual  Report and Accounts of Peerles for  the  years 1988,  1989 and 1990 it is clear that it had  conducted  its business following the impugned directions of 1987 and still had earned substantial profits in these years.  It is  clear that Peerless is a company having established as back as  in 1932  and had substantial funds to invest the entire  amount of deposits and had met the expenses out of its  accumulated profits of the past years.  This shows that the business can be  run and profit can be earned even after  complying  with the impugned directions of 1987 issued by the Reserve  Bank. It  is  not  the concern of this court to  find  out  as  to whether  actuarial method of accounting or any other  method

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would  be  feasible or possible to adopt  by  the  companies while carrying out the conditions contained in paragraphs  6 and 12 of the directions of 1987.  The companies are free to adopt  any mode of accounting permissible under the law  but it is certain that they will have to follow the entire terms and conditions contained in the impugned directions of  1987 including those contained in paragraphs 6 and 12.  It is not the  function of the Court to amend and lay down some  other directions and the High Court was totally wrong in doing so. The  function  of  the Court is not  to  advise  in  matters relating to financial and economic policies for which bodies like  Reserve Bank are fully competent.  The Court can  only strike down some or entire directions issued by the  Reserve Bank in case the Court is satisfied that the directions were wholly  unreasonable or violative of any provisions  of  the Constitution  or  any Statute.  It would  be  hazardous  and risky  for  the courts to tread an unknown path  and  should leave  such  task  to the expert  bodies.   This  court  has repeatedly said that matters of economic policy ought to  be left to the Government.  While dealing with the validity  of an order passed on September 30, 1977 fixing a retail  price of mustard oil not                                                        446 exceeding  Rs.  10   per  kilogram  in  exercise  of  powers conferred  by Section 3 of the Essential Commodities Act,  a bench of 7 Judges of this Court in M/s Prag Ice & Oil  Mills and  another v. Union of India and Nav Bharat Oil Mills  and another  v.  Union  of India [1978] 3 SCC  459  observed  as under:          "We  have  listened to long arguments  directed  at          showing  us  that producers and sellers of  oil  in          various  parts of the country will suffer  so  that          they would give up producing or dealing in  mustard          oil.    It  was  urged  that  this   would,   quite          naturally, have its repercussions on consumers  for          whom mustard oil will become  even more scarce than          ever  ultimately.  We do not think that it  is  the          function  of this Court or of any Court to  sit  in          judgment  over such matters of economic  policy  as          must  necessarily be left to the Government of  the          day to decide.  Many of them, as a measure of price          fixation  must  necessarily  be,  are  matters   of          prediction  of  ultimate  results  on  which   even          experits can  seriously  err  and  doubtlessly   be          differ.   Courts can certainly not be  expected  to          decide them without even the aid of experts".      In  Shri Sitaram Sugar Company Limited and  another  v. Union  of India & others with U.P. State  Sugar  Corporation Ltd.,  and another v. Union of India & Others, [1990] 3  SCC 223 this Court observed as under:          "Judicial  review is not concerned with matters  of          economic policy.  The Court does not substitute its          judgment for that of the legislature or its  agents          as to matters within the province of  either.   The          Court does not supplant the "feel of expert" by its          own  views.  When the legislature acts  within  the          sphere  of its authority and delegates power to  an          agent, it may empower the agent to make findings of          fact  which are conclusive provided  such  findings          satisfy  the test of reasonableness.  In  all  such          cases, judicial inquiry is confined to the question          whether  the  findings of fact  are  reasonably  on          evidence  and whether such findings are  consistent          with the laws of the land.      In  R.K.  Garg v. Union of India & others,  etc.  etc.,

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[1981]  4  SCC 675 at p. 690 a Constitution  Bench  of  this Court observed as under:          "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, be-                                                        447          cause 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  defence  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          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".      It  may also be noted that it is not possible  for  the Court  to determine as to how much percentage of deposit  of first  instalment should be allowed towards  expenses  which may  consist of commission to agents, office  expenses  etc. Even  amongst the three companies-viz. Peerless,  Timex  and Favourite, there is a difference in this regard.   According to  the Peerless 25 %, Timex 50 % and Favorite 60 %  of  the deposits  of  the first instalment would  be  necessary  for generating  the  working  capital for  meeting  the  genuine expenses.   Thus  it would depend from  company  to  company based on various factors such as paid-up-capital, percentage of  commission paid to the agents, rate of interest paid  to the  depositors,  period of maturity for  repayment,  office expenses  and  various  other factors necessary  to  mop  up working  capital  out of the depositors  money.   We  cannot ignore  the possibility of persons having no stake of  their own  starting  such  business  and  after  collecting   huge deposits from the investors belonging to the poor and weaker section of the society residing in rural areas, and to  stop such business after a few years and thus devouring the  hard earned money of the small investors.  It cannot be lot sight that  in  such  kind of business,  the  agents  always  take interest  in finding new depositors because they get a  high rate of commission out of the first instalment, but they  do not have same enthusiasm in respect of deposit of subsequent instalments.   In these circumstances, if the  Reserve  Bank has issued the                                                       448

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directions  of 1987 to safeguard the larger interest of  the public  and  small  depositors it cannot be  said  that  the directions   are   so  unreasonable  as   to   be   declared constitutionally invalid.      It has been vehemently contended before us on behalf of the  Peerless  employees and field agents that in  case  the impugned  directions are not struck down, the Peerless  will have  to  close down its business and several  thousands  of employees and their family and several lakhs of field agents would  be thrown on the street and left with no  employment. We do not find any force in the above contention.  So far as Peerless is concerned there is no possibility of its closing down such business.  It has already large accumulated  funds collected by making profits in the past several years.  Thus it has enough working capital in order to meet the expenses. We  are  not  impressed with the  argument  of  Mr.  Somnath Chatterjee,  Learned Senior Advocate for the  Peerless  that after  some years the Peerless will have to close  down  its business if directions contained in paragraphs 6 and 12  are to  be  followed.  The working capital is not  needed  every year  as it can be rotated after having invested  once.   If the  entire  amount  of  the  subscribers  is  deposited  or invested  in the proportion of 10 % in public sector  banks, 70  % in approved securities and 20 % in other  investments, such  amounts will also start earning interest which can  be added  and  adjusted  while  depositing  or  investing   the subsequent  years  of deposits of the subscribers.   In  any case it lies with the new entrepreneurs while entering  such field of business to make arrangement of their own resources for  working capital and for meeting the expenses  and  they cannot  insist in utilising the money of the depositors  for this purpose.  So far as the companies already in this field they must have earned profits in the past years which can be utilised as their working capital.  It is important to  note that  the  impugned  directions  of  1987  have  been   made applicable  from  15th  May,  1987  prospectively  and   not retrospectively.   Thus under these directions the  question of depositing the entire amount of subscriptions would  only apply to the deposits made after 15th May, 1987.      We  may  also observe that the impugned  directions  of 1987  as  well as any other directions issued from  time  to time  by the Reserve Bank relating to economic or  financial policy  are  never so sacrosanct  that the  same  cannot  be changed.   Even the financial budget for every year  depends on  the  economic  and financial policy  of  the  Government existing  at  the  relevant time.  So far  as  the  impugned directions  are concerned if it is found in future that  the same  are  not  workable  or  working  against  the   public interest,  the  Reserve Bank is always free  to  change  its policy  and  scrap  or  amend the  directions  as  and  when necessary.  We have no doubt                                                        449 that  if  in  times  to come the  Reserve  Bank  feels  that business  of the kind run at present by Peerless  and  other companies,  in  terms  of the directions  of  1987  are  not yielding  the  result as envisaged by the Reserve  Bank,  it will  always be prepared to consider any new proposals which may be conducive both in the interest of the large multitude of the investors as well as the employees of such companies. Mr.  Shanti  Bhushan, learned Senior  Counsel  appearing  on behalf of the Reserve Bank made a candid statement on behalf of  the Reserve Bank that the Reserve Bank would  always  be prepared  to consider any new proposal which  would  observe the public interest.      In the result I set aside the orders of the High  Court

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and  allow  the appeals arising out SLP Nos.  6930-30  A  of 1991,  7140  of 1991 and 3676 of 1991 filed by  the  Reserve Bank of India and dismiss the wirt petition No. 677 of 1991. No order as to costs.      K.RAMASWAMY,  J.  While respectfully agreeing  with  my learned  brother since the issues bear far reaching  seminal importance, I propose to express my views as well.      This  Court in Reserve Bank of India etc.  v.  Peerless General Finance and Investment Co. Ltd. & Ors. etc.,  [1987] 2 SCR  1 for short ‘first Peerless case’ while holding  that Prize    Chits and Money Circulation Schemes (Banning)  Act, 1978 does not attract "Recurring Deposits Schemes",  pointed out  that  the  schemes harshly  operate  against  the  poor sections of the society who require security and protection; urgent  action appeared to be called for and was  imperative to  protect the public and emphasized to evolve  fool  proof scheme  to  prevent  fraud being  played  upon  persons  not conversant  with practices of the financial enterprises  who pose themselves as benefactors of the people.  In  pursuance thereof  the  appellant, Reserve Bank of  India,  for  short ‘RBI’ issued Residuary Non-Banking Companies (Reserve  Bank) Directions,  1987  for short ‘the  Directions’.   The  short shift  with  avid eye into the relevant  provisions  of  the Reserve Bank of India Act 2 of 1934 for short ‘the Act’  and "the  directions" would enable us to come to grips with  the scope  of  the  scheme of the directions,  its  purpose  and operation.   Chapter III(B) of the Act deals with the  power of  RBI  to  regulate  non-banking  institutions   receiving deposits.  Section 45 (1) (bb) defines deposit includes  and shall  be  deemed always to have included  "any  receipt  or money  by  way of deposit or loan or in any other  form  but does  not include..." exceptions are not relevant and  hence are   omitted.    Section  45(1)  (c)   defines   ‘financial institution’  to  mean  any  non-banking  institution  which carries on its business, or part of its business, in any  of the  following activities; clauses (i) to (v)  are  omitted, clause (vi) collect-                                                        450 ing for any purpose of any scheme or arrangement by whatever name  called,  monies  in lump-sum or otherwise  by  way  of subscription...or in any other manner by awarding prizes  or gifts...,  whether in cash or kind or disbursing  monies  in any other way to persons  from whom monies are collected  or to  any other persons but does not include...the  exclusions are  not relevant and hence omitted.  Section  45J  empowers that  RBI  may,  if it considers  necessary  in  the  public interest so to do, by general or special order, (a) regulate or prohibit the issue by any non-banking institution of  any prospectus  or  advertisement soliciting deposits  of  money from the public; and (b) specify the conditions, subject  to which   any  such  prospectus  or  advertisement,   if   not prohibited, may be issued.  Section 45K empowers the RBI  to collect  information  from  non-banking  institution  as  to deposit  and  to  give  directions  that  every  non-banking institution shall furnish to the Bank, in such form, at such intervals and within such time, such statements, information or  particulars  relating  to  or  connected  with  deposits received by the non-banking institution, as may be specified by  RBI by general or special order including the  rates  of interest  and other terms and conditions on which  they  are received.  Under sub-section (3) thereof the RBI is entitled to  issue in the public interest directions  to  non-banking institution  in  respect  of  any  matter  relating  to   or connected  with the receipt of deposits including the  rates of  interest  payable on such deposits and the  periods  for

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which  deposits may be received.  The use of  the  adjective ‘any’  matter relating to or connected with the  receipt  of deposits  is  wide and comprehensive to empower the  RBI  to issue directions in connection therewith or relating to  the receipt  of deposits.  But exercise of power is hedged  with and should be "in the public interest."      Section 45L provides that if the RBI is satisfied  that for  the  purpose  of enabling it "to  regulate  the  credit system of the country to its advantage it is necessary so to do"; it may give to such institutions either generally or to any such institution, in particular, "directions relating to the  conduct  of  business" by them or by  it  as  financial institution   or   institutions  including   furnishing   of information  of  particulars "relating to paid  up  capital, reserves  or other liabilities", the  "investments"  whether "in  the Government securities" or "otherwise", the  persons to whom, and the purposes and periods for which; finance  is provided  "the terms and conditions",  including "the  rates of   interest",  on  which  it  is  provided.   Section  45Q provides  that  the provisions of this  chapter  shall  have effect  "notwithstanding  anything  inconsistent   therewith contained  in any other law" for the time being in force  or any instrument having effect by virtue of any such law.      The  directions  became operative from  May  15,  1987. They would apply to every Residuary Non-Banking Company  for short ‘R.N.B.C’                                                        451 which   receive  any  deposit  scheme  in  lump-sum  or   in instalment by way of contribution or subscription or by sale of  units  of certificates or other instruments or  "in  any other  manner"  vide Clause II of  the  definition.   Clause III(A)  defines deposits as defined in s.45(1) (bb)  of  the Act.  Paragraph 4 regulates receipt of deposits for a period not  less than 12 months and not more than 120  months  from the  first day of the receipt of the deposit.   Paragraph  5 prescribes  minimum rate of return of 10 per cent per  annum (to  be compounded annually) on the amount  deposited.   The proviso empowers R.N.B.C. at the request of the depositor to make repayment of the deposit, after the expiry of a  period of  one  year from the date of the deposit  but  before  the expiry  of the period the deposit with two per cent  reduced rate of interest from 10 % interest.  Paragraph 6, the heart of  the  directions consists of  three  sub-paragraphs  with explanations.   The  marginal note expresses  "security  for depositors".  Sub-paragraph (1) thereof provides that on and from  May  15, 1987 every R.N.B.C. shall  deposit  and  keep deposited  in  fixed deposits with public  sector  banks  or invest and keep invested in unencumbered approved securities (such securities being valued at their market value for  the time  being), or in other investments, which in the  opinion of the company are safe, a sum which shall not, at the close of  business on 31 st December, 1987 and thereafter  at  the end  of each half year that is, 30th June and 31st  December be less than the aggregate amounts of the liabilities to the depositors whether or not such amounts have become  payable. The proviso specifies that the sum so deposited or  invested (a)  not  less than 10 per cent shall be in  fixed  deposits with any of the public sector banks (b) not less than 70 per cent shall be in approved securities; and (c) not more  than 20 per cent or 10 times the net owned funds of the  company, whichever  amount  is less, shall be in  other  investments. Provided that such investments shall be with the approval of the Board of Directors of the company, the explanation  "Net Owned funds" shall mean the aggregate of the paid-up capital and free reserves as appearing in the latest audited balance

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sheet of the company as reduced by the amount of accumulated balance  of  loss, deferred revenue  expenditure  and  other intangible assets, if any, as disclosed in the said  balance sheet.  Sub-paragraph (2) enjoins toe R.N.B.C to entrust  to one  of the public sector banks designated in  that  behalf. Deposits  and securities referred to in clauses (a) and  (b) of  the  proviso  to sub-paragraph (1) to be  held  by  such designated bank is for the benefit of the depositors.   Such securities  and  deposits  shall not  be  withdrawn  by  the R.N.B.C.  or otherwise dealt with, except for  repayment  to the depositors.  Sub-paragraph  (3) obligates it to  furnish to  the R.B.I. within 30 days from the close of business  on 31st  December, 1987 and thereafter at the end of each  half year i.e., as on 30th June and 31st December, a  certificate from  its auditors, being member of institute  of  Chartered Accountants, to the effect                                                        452 that  the  amounts  deposited  in  fixed  deposits  and  the investment made are not less than "the aggregate amounts  of liabilities  to  the depositors" as on 30th  June  and  31st December  of that year.  Explanation thereto makes  explicit what  the  "aggregate  amount  of  liabilities";   "approved securities";  and  "public sector banks"  and  "unencumbered approved  securities" are meant to be the details  of  which are not necessary for the purpose of this case.  Paragraph 7 abolishes  the  power  of  the  R.N.B.C.  of  forfeiture  of deposits; paragraph 8 prescribes particulars to be mentioned in  the  form  soliciting  deposits;  paragraph  9   enjoins issuance of the receipts to the depositors and paragraph  10 obligates  to  maintain  the register  with  particulars  of depositors  mentioned  therein.  Paragraph  II  enjoins  its Board  of  Directors  to furnish the  information  in  their report  as  envisaged therein.  Paragraph 12 which  is  also material  for the purpose of this case provides  that  every R.N.B.C.  shall  disclose  as liabilities in  its  books  of accounts  and balance sheets, the total amount  of  deposits received  together  with interest, bonus,  premium  or other advantage, accrued or payable to the depositors.   Paragraph 13 enjoins to supply to R.B.I. copies of the balance  sheets and  accounts together with Directors report.  Paragraph  14 obligates the company to submit returns to the R.B.I. in the manner envisaged thereunder.  R.N.B.C. has to submit balance sheet,  returns  etc.  to the department  of  the  Financial Companies  as  per  paragraph 15.   Paragraph  16  obligates R.N.B.C.  to comply with the requirement of the  non-banking financial companies and miscellaneous non-banking  companies (Advertisement) Rules, 1977 etc. and actual rate of interest etc.  to  the  depositor.   Paragraph  17  applies  to   the prospective  R.N.B.C. to furnish information in Schedule  C. Paragraph  18  accords  transitory power  and  paragraph  19 empowers the  R.B.I., if it considers necessary to avoid any hardship  or for any other just and sufficient  reasons,  to grant  extensions  of  time to comply with  or  exempt,  any company  or  class  of companies, from all  or  any  of  the provisions  of  the directions either generally or  for  any specified  period, subject to such conditions as the RBI may impose  and  paragraph  20  excludes  the  applicability  of paragraph 19 of the Non-Banking Financial Companies (Reserve Bank) Directions, 1977.      The High Court declared paragraphs 6 and 12 to be ultra vires  of Art. 19(1)(g) and 14 of the  Constitution  holding that  though  the directions do not expressly  prohibit  the business  of  receiving  any deposit  under  any  scheme  or arrangement   in  lump-sum  or  in  instalment  by  way   of contribution  or  subscription  by R.N.B.C.  in  effect  the

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operation  of the directions inhibit the  existing  business and  prohibits the future companies to come into being.   As seen  the public purpose of the directions is to secure  for the  depositors, return of the amounts payable  at  maturity together   with  interest,  bonus,  premium  or  any   other advantage accrued or payable to the                                                        453 depositors.  To  achieve  that  object  every  R.N.B.C.   is enjoined to deposit and keep deposited in fixed deposit  and invest   and   keep  invested  in   unencumbered    approved securities a sum which shall not, at the close of each  half year, be less than the aggregate amount of the liability  to the  depositors  whether  or  not  such  amount  has  become payable.  The object, thereby, is to prohibit deployment  of funds  by  R.N.B.C.  in any other manner  which  would  work detrimental to the interest of the depositors.     The  question  emerges whether paragraph 6  and  12  are ultra vires of Articles 19(1)(g) and 14 of the Constitution. Article 19(1)(g) provides fundamental rights to all citizens to carry on any occupation, trade or business. Cl. 6 thereof empowers the State to make any law imposing, in the interest of  the  general  public,  reasonable  restrictions  on  the exercise   of  the  said  rights.  Wherever  a  statute   is challenged as violative  of the fundamental rights, its real effect or operation on the fundamental rights is of  primary importance.  It is the duty of the  court to be watchful  to protect  the constitutional rights of a citizen  as  against any encroachment gradually or stealthily thereon. When a law has imposed restrictions on the fundamental rights, what the court  has  to examine is the substance of  the  legislation without  being  beguiled  by  the  mere  appearance  of  the legislation.    The   Legislature   cannot    disobey    the constitutional mandate by employing an indirect method.  The court  must consider not merely the purpose of the  law  but also  the means how it is sought to be secured or how it  is to  be  administered. The object of the legislation  is  not conclusive as to the validity of the legislation. This  does not   mean  the  constitutionality  of  the  law  shall   be determined  with  reference to the manner in  which  it  has actually  been  administered or operated  or  probably  been administered  or operated by those who are charged with  its implementation.  The court cannot question the  wisdom,  the need  or  desirability  of the  regulation.  The  state  can regulate  the exercise of the fundamental right to save  the public from a substantive evil. The existence of the evil as well  as the means adopted to check it are the  matters  for the  legislative  judgment.  But the court  is  entitled  to consider  whether  the  degree and mode  of  the  regulation whether is in excess of the requirement or is imposed in any arbitrary  manner. The court has to see whether the  measure adopted is relevant or appropriate to the power exercised by the  authority or whether over stepped the limits of  social legislation. Smaller inroads may lead to larger inroads  and ultimately  result in total prohibition by indirect  method. If it directly transgresses or substantially and  inevitably effects the fundamental right, it becomes  unconstitutional, but  not  where  the  impact is only  remotely  possibly  or incidental.  The court must lift the veil of the   form  and appearance to discover the true character and the nature  of the  legislation, and every endeavor should be made to  have the  efficacy  of  fundamental  right  maintained  and   the legislature is                                                        454 not   invested  with  unbounded  power.  The    court   has, therefore, always to guard against the gradual encroachments

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and  strike  down a restriction as soon as it  reaches  that magnitude of total annihilation of the right.     However,  there is presumption of  constitutionality  of every  statute and its validity is not to be  determined  by artificial  standards.  The court has to examine  with  some strictness  the substance of the  legislation to  find  what actually  and  really the legislature has  done.  The  court would  not  be over persuaded by the mere  presence  of  the legislation. In adjudging the reasonableness of the law, the court will necessarily ask the question whether the  measure or scheme is just, fair, reasonable and appropriate or is it unreasonable, unnecessary and arbitrary interferes with  the exercise  of  the  right  guaranteed  in  Part  III  of  the Constitution.     Once it is established that the statute is  prima  facie unconstitutional,  the  state  has  to  establish  that  the restrictions  imposed are reasonable and the objective  test which  the court to employ is whether the restriction  bears reasonable   relation  to  the  authorized  purpose  or   an arbitrary  encroachment  under  the  garb  of  any  of   the exceptions envisaged  in Part III. The reasonableness is  to the  necessity to impose restriction; the means  adopted  to secure  that end as well as the procedure to be  adopted  to that end.     The  court has to maintain delicate balance between  the public interest envisaged in the impugned provision and  the individual’s  right; taking into account, the nature of  his right  said to be infringed; the underlying purpose  of  the impugned  restriction;  the extent and urgency of  the  evil sought  to  be remedied thereby; the  disproportion  of  the restriction imposed, the prevailing conditions at the  time, the  surrounding circumstances; the larger  public  interest which  the  law  seeks to achieve  and  all  other  relevant factors  germane for the purpose. All these  factors  should enter   into   the  zone  of  consideration  to   find   the reasonableness of the impugned restriction. The court weighs in each case which of the two conflicting public or  private interest demands greater protection and if it finds that the restriction imposed is appropriate, fair and reasonable,  it would  uphold the restriction. The court would not uphold  a restriction  which is not germane to achieve the purpose  of the statute or is arbitrary or out of its limits.     This  Court  in Joseph Kuruvilla Vellukunnel v.  Reserve Bank of India & Ors.,[1962] Suppl. 3 SCR 632, held that  the RBI  is ‘‘a bankers’ bank and lender of the  last  resort.’’ Its  objective is to ensure monetary stability in India  and to operate regulate  the credit system of the country. It                                                        455 has,  therefore, to perform a delicate balance  between  the need  to preserve and maintain the credit structure  of  the country by strengthening the rule as well as apparent credit worthiness  of  the banks operating in the country  and  the interest of the depositors. In under developed country  like ours, where majority population are illiterate and poor  and are  not  conversant with banking operations and  in  under- developed  money and capital market with mixed economy,  the constitution  charges the state to prevent exploitation  and so the RBI would play both promotional and regulatory roles. Thus the R.B.I. occupies place of ‘‘pre-eminence’’ to ensure monetary  discipline  and  to regulate the  economy  or  the credit  system  of the country as an expert  body.  It  also advices  the  Government  in  public  finance  and  monetary regulations.  The  banks or non-banking  institutions  shall have  to regulate their operations in accordance  with,  not only as per the provisions of the Act but also the rules and

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directions or instructions issued by the RBI in exercise  of the  power  thereunder.  Chapter  3B  expressly  deals  with regulations of deposit and finance received by the R.N.B.Cs. The directions, therefore, are statutory regulations.     In  State  of U.P. v. Babu Ram, [1961] 2 SCR  679,  this Court held that rules made under a statute must be  treated, for all purposes of construction or obligations, exactly  as if  they were in that Act and are to the same effect  as  if they  contained in the Act and are to be judicially  noticed for  all  purposes  of  construction  or  obligations.   The statutory   rules  cannot  be  described  or  equated   with administrative  directions. In D.V.K.  Prasada Rao v.  Govt. of   A.P.,  AIR  1984  AP  75,  the  same  view  was   laid. Therefore,  the directions are incorporated and become  part of  the  Act  itself.  They must be  governed  by  the  same principles as the statute itself. The statutory  presumption that  the  legislature  inserted every part  thereof  for  a purpose  to  and the legislative intention should  be  given effect to, would be applicable to the impugned directions.     The  R.B.I.  issued  the  directions  to  regulate   the operations  of the R.N.B.Cs., to safeguard the  interest  of the depositors. Payment of interest, bonus, premium or other advantage,  in whatever name it may be called is reward  for waiting  or  parting with liquidity. It is paid  because  of positive  time preference (one rupee today is  preferred  to one rupee tomorrow)on the part of the depositor.  Therefore, the   directions  avowed  to  preserve  the  right  of   the depositors  to  receive back the amount deposited  with  the contracted rate of interest; it aims to prevent depletion of the  deposits   collected from the weaker  segments  of  the society  and also tends to effect free flow of the  business of  the R.N.B.Cs. who would desire to operate in  their  own way. The question, therefore, emerges whether the directions in  paras  5  and 12 violate Arts. 14 and  19(1)(g)  of  the Constitution.                                                        456     The  solidarity of political freedom hinges upon  socio- economic  democracy. The right to development is one of  the most  important facets of basic human rights. The  right  to self  interest  is  inherent  in  right  to  life.   Mahatma Gandhiji, the Father of the Nation, said that ‘‘Every  human being  has  a  right  to live  and  therefore  to  find  the wherewithal to feed himself, and where necessary, to  clothe and house himself’’. Article 25 of the Universal Declaration of  Human Rights provides that ‘‘everyone has a right  to  a standard of living adequate for the health and well being of himself and of his family, including food, clothing, housing and  medical  care.’’ Right to life  includes the  right  to live with basic human  dignity with necessities of life such as  nutrition,  clothing,  food,  shelter  over  the   head, facilities  for  cultural and socio-economic well  being  of every  individual.  Art.  21  protects  right  to  life.  It guarantees and derives therefrom the minimum of the needs of existence including better tomorrow.     Poverty  is not always an economic problem  alone.  Very often  it  is  a  social  as  well  as  human  problem.   An agriculturist, an industrial worker, the daily wage  earner, rickshaw  puller and small self-employed  teacher,  artisan, etc.  may have an earning but may be prone to spend  his/her entire earnings, apart from on daily necessities of life, on socio-religious  occasions, fairs, festivals etc.  The  urge for  better tomorrow and prosperous future; the clamour  for freedom from want of any kind and social security, make  the vulnerable  segments  of the society  to  sacrifice  today’s comforts  to save for better tomorrow. The habit  of  saving

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has an educative value for thrift. It endeavors to bring  an attitudinal change in life. It enables individuals to assess future specific needs and to build up a financial  provision for  the purpose. The habit of saving becomes a way of  life and  harnesses  the  meagre resources  to  build  up  better future.  During  the days of rising  prices,  small  savings serve as instrument to mop up the extra purchasing power. In addition  to  wage  a war  against  poverty,  waste,  unwise spending,  hoarding  and other activities, habit  of  saving also  enables  family budgeting and  postponing  expenditure which  can  be deffered in favour of better  utilisation  in future. To strengthen the urge for thrift and streamline the social   security,  the  disadvantaged  need  freedom   from exploitation  and  Art.46 of the  constitution  enjoins  the State to protect the poor from all forms of exploitation and social injustice.     Investment    agencies   or   commercial    banks    are intermediaries  between  savers and investors.  They  embark upon  deposit  mobilisation campaign to mop up  the  limited resources.   Commercial   banks  or   financial   investment agencies,  be it public sector or private sector, are  vying with one another to scale new heights in deposit growth each year, devising                                                        457 different  deposit schemes to suit the individual  needs  of the  depositors  or savers. Mushroom growth  of  non-banking agencies put afloat diverse schemes with alluring offers  of staggering high rate of interest and other catchy advantages which  would  generate suspicion of the bona  fides  of  the offer.  But gullible depositors are lured to make  deposits. It is not uncommon that after collecting fabulous  deposits, some  unscrupulous people surreptitiously close the  company and  decamp with the collections keeping the  depositors  at bay.     Therefore,    the    need    to    regulate     the deposits/subscriptions,  in  particular, in  private  sector became  imperative to prevent exploitation or  mismanagement as social justice stratagem.     The directions are, therefore, a social control  measure over the R.N.B.Cs., in matters connected with the  operation of  the  schemes  or incidental thereto.  The  direction  to investment   in  the  channelised  schemes  at   the   given percentage  in clauses (a) and (b) of proviso to  para  6(1) was intended to deposit or keep deposited the collections in fixed  deposit in the public sector banks or invest or  keep invested in unencumbered approved securities so as to ensure safety, steady growth and due payment to the subscribers  at maturity  of the principal amount and the  interest,  bonus, premium  or  other advantage accrued  thereon.  The  amounts deposited shall not be less than the total aggregate amounts of   liabilities  to  the  subscribers.  The   deposits   or securities shall not be withdrawn or otherwise be dealt with except for a repayment to the subscribers. It should  always be shown to be a liability till date of the repayment.     This court in Hatisingh Mfg. Co. Ltd. & Anr. v. Union of India & Ors. [1960] 3 SCR 528, held that freedom to carry on trade or business is not an absolute one. In the interest of the  general public, the law may impose restrictions on  the freedom  of the citizen to start or carry on  his  business, whether  an  impugned  provision imposing a  fetter  on  the exercise  of  the  fundamental  right  guaranteed  by   Art. 19(1)(g)  amounts  to a reasonable  restriction  imposed  in the interest of general public, must be adjudged not in  the background  of any theoretical standard  or  pre-determinate patterns,  but in the light of the nature and the  incidence of  the right, the interest of the general public sought  to

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be  secured by imposing restrictions and the  reasonableness of the quality and the extent of the fetters imposed by  the directions.  The credit worthiness of R.N.B.Cs.  undoubtedly would  be sensitive. It thrives upon the confidence  of  the public, on the honesty of its management and its  reputation of solvency. The directions intended to promote  ‘‘freedom’’ and  ‘‘facility’’ which are required to be regulated in  the interest  of all concerned. The directions as a part of  the scheme  of the Act would be protected from the attack.  Vide Latafat Ali Khan & Ors. v. State of U.P., [1971] Suppl.  SCR 719.                                                        458     The  R.N.B.C.  is  required  to  conduct  its   business activities in the interest of the depositors or  subscribers who are unorganised, ignorant, gullible and ignorant of  the banking  operations.  If, however, the acts of  R.N.B.C.  is detrimental  to  the interest of the  depositors,  etc.  the R.B.I.  has power in Chapter 3B to issue directions and  the R.N.B.C.  is  bound to comply with the directions  and  non- compliance thereof visits with penal action.     Admittedly except Peerless General Insurance, the  other companies do not have either paid-up capital or reserve fund worth  the name. Peerless was established in the  year  1932 and  over the years it built up reserve fund. R.N.B.Cs.  are carrying their business by crediting the entire first year’s collections as a capital receipt under actuarial  accounting method.  In  the  affidavit of Sri S.S.  Karmic,  the  Chief Officer  of the RBI filed on August 13, 1991, it was  stated that  prior to the directions, 747 R.N.B.Cs. were doing  the business.  As on that date only 392 R.N.B.Cs. were  notified to  be existing. Out of them 178 are in West Bengal,  15  in Assam,  26  in  Orissa, 6 in Manipur and  Meghalaya,  26  in Punjab,  64 in U.P., 22 in Delhi, etc. As on March 31,  1990 out of 185, 35 R.N.B.Cs. alone submitted annual returns, and out  of  them only 30 have filed  their  balance-sheets.  28 R.N.B.Cs. in the northern region filed their annual  returns and  23 filed their balance-sheets with incomplete date.  35 of  them have negative net-worth (loss for  exceeding  their share  capital  and  reserve).  Apart  from  Peerless,   the aggregate  capital investment of 15 companies  accounted  to Rs.  158  lacs. The negative net-worth of the  35  companies referred  to  above would aggregate to Rs.3.6  crores.  They raised, apart from Peerless, deposits to the tune of Rs.  86 crores. Many of them have not even designated their banks as required under para 6 of the direction. The amount  invested in bank deposits and approved securities fell much short  of their  deposit  liabilities. Verona  Commercial  Credit  and Investment Company, one of the respondents, have accumulated losses  to the tune of Rs. 3.8 crores. As per  balance-sheet their assets are inadequate to meet the liability. Favourite Small  Scale  Investment,  one  of  the  respondents  as  on December  12,  1989, even  their  provisional  balance-sheet shows  that total liability towards depositors is Rs.  44.62 crores while its investment in banks and Government security is only Rs. 13 crores. The cash on hand was Rs. 1.74 crores. Rs.8  crores  were  shown  to be  loans  and  advances.  The accumulated  losses  are Rs.22.19 crores  as  against  total share  capital and reserve of Rs. 20.73 lacs. It  is,  thus, clear on its face that while total liabilities are Rs. 49.09 crores,  the  assets including doubtful loans  and  advances aggregate  to Rs. 26 crores. An inspection into the  affairs of  the said company conducted in February,  1990  disclosed that upto the end of 1989 the deposit liabilities  including interest would be in the region of                                                        459

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over  Rs. 132 crores. The difference between the  inspection and  the balance-sheet would be due to actuarial  principle. It  had  committed default to pay to its depositors  to  the tune of Rs. 5.4 crores, which is a gross under-estimate.     Sri  Somnath Chatterjee, the learned Senior Counsel  for the  Peerless and adopted by other counsel,  contended  that paragraphs  6 and 12 are totally unworkable. Its  compliance would  jeopardise not only the existing companies  but  also the  very interest  of the depositors and large workmen.  No new  company  would be set up. The direction  given  in  the first Peerless case was to keep in view the interest of  the workmen  as well; in effect it was given a go-bye. At  least 25% of collections would be left over as working capital  of the company, to carry on its business in a manner  indicated by  the impugned judgment, so that no depositor  would  lose his  money and no workmen would lose his livelihood  and  it will  be  in  consonance with public  interest.   Shri  G.L. Sanghi, the learned Senior Counsel for Timex, contended that 50%  of  collection would be necessary to  comply  with  the impugned  directions  and another company pleaded  for  40%. Further contention of Shri Chatterji was that the  actuarial accounting neither violates any law, nor objected to by  the Income-tax   Department.   Crediting   the   first    year’s subscription  in  the  accounts  as  capital  receipt  would generate  company’s  working  capital  for  its   successful business  by meeting the expenditure towards  establishment, the commission and a part of profits. Forfeiture clause  was already dated before the directions were issued. Interest at 10%  with annual compounding would be reasonable  return  to the  subscribers which is being ensured to  the  depositors. The  directions  issued by the High Court,  subject  to  the above modifications, would subverse the above purpose. Paras 6 and 12, otherwise, are arbitrary and prohibitive violating their  fundamental  right to do business  assured  by  Arts. 19(1)(g)  and 14. Sri Harish Salve resisted the  contentions with ability.     Para  12 is myocardium and para 6’ is the heart  of  the directions  without which the directions would  be  purified corpse.  On the respondents own showing, for the  first  two years, by actuarial accounting, the liabilities, as  against deposits, are inadequate. The regulation intends to preserve the corpus of the deposits and the interest payable  thereon as  on date to be a tangible and unencumbered asset  at  all times,    though    not    repayable.    Indisputably    the depositors/subscribers   stand   as   unsecured   creditors. Undoubtedly every measure cannot be viewed or interpreted in the event of catastrophe overtaking the company. The  catchy and  alluring  but  beguiled  terms  of  offer  attract  the vulnerable  segments  of the society to subscribe  and  keep subscribing the small savings for better tomorrow.                                                       460 But  many a time, by the date of maturity, their  hopes  are belied  and aspirations are frustrated or dashed to  ground. They remain to be helpless spectators with all  disabilities to recover the amounts. Pathetic financial position of  some of  the  companies  enumerated  herein  before  would  amply demonstrate the agony to which the poor subscribers would be subjected to. The fixed deposits and unencumbered securities as per Clauses (a) and (b) of the proviso to paragraph  6(1) would be 80% of the collections of the year of  subscription and Shri Chatterji contends to reduce it to 75% and to allow free  play  to  use  the  residue  in  their  own  way.  The difference  is only 5% and others at vagary. The objects  of the direction are to preserve the ability of the R.N.B.C. to pay  back to the subscribers/depositors at any  given  time;

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safety   of  the  subscribers’  money  and  his   right   to unencumbered repayment are thus of paramount public interest and  the  directions aimed to protect them.  The  directions cannot  and  would  not be adjudged to be   ultra  vires  of arbitrary by reason of successful financial management of an individual  company. An over all view of the working  system of the scheme  is relevant and germane.     The obligation in paragraph 12 of periodical  disclosure in  the accounts of a company of the deposits together  with the  interest  accrued thereon, whether or not  payable  but admittedly due as a liability, is to monitor the  discipline of the operation of the schemes and any infraction, would be dealt  with  as  per law. The  certificate  by  a  qualified Chartered  Accountant  is to vouchsafe the  correctness  and authenticity of accounts  and would and should adhere to the statutory compliance.     The  settled  accounting  practice is  that  a  loan  or deposit  received  from  a creditor has to  be  shown  as  a liability  together  with accrued interest  whether  due  or deferred.  The actuarial accounting applies to revenues  and costs  to which the concept of the ‘‘going concern’’ can  be adopted. Therefore, in providing the costs of the company it can  set  apart  its costs on the basis  that  liability  is created  for  interest, bonus etc.  payable  in  foreseeable future.  Undoubtedly the actuarial principle applied by  the L.I.C.  or the gratuity schemes are linked with life of  the assured  or  the  premature death before  retirement  of  an employee,  but R.N.B.C. in its contract does  not  undertake any  such risk. The deposit is a capital receipt but  not  a revenue  receipt  and its full value shall be shown  in  the account books of balance-sheet as liability of the  company. It  cannot be credited to the profit and loss account.  Para II  of Schedule VI of the Companies Act, 1956 requires  that the  amount shown in the profit and loss account  should  be confined to the income and expenditure of the company.  Para 12  of  the  directions is, thus,  in  consonance  with  the Companies  Act.  Moreover,  in  its  advertisement  and  the application forms,                                                        461      the  R.N.B.C.  expressly hold out to  the  public  that their  monies are safe with the bank and in  the  Government securities.  Paragraph 6(1) of the directions only  mandates compliance  of  the  promise held out  by  an  R.N.B.C.  for repayment  at  maturity.  Sub-para (3) of para 6  keeps  the deposits  unencumbered  and to be utilised  by  the  company only  for  repayment.   In other  words,  paragraph  6  only elongates  the contract in the public interest to  safeguard the  interest of the vulnerable sections of the  depositors. The  R.B.I.  cannot be expected to  constantly  monitor  the working  of  the R.N.B.C. in its day-to-day  function.   The actuarial  basis cannot be adopted by the R.N.B.Cs. and  the liability  must always be reflected in its balance-sheet  at its  full  value.  Compliance of the direction in  para  12, dehors  any method of accountancy    adopted by  a  company, intended to discipline its operations.      No-one can have fundamental right to do any unregulated business  with the subscribers/depositors’ money.  Even  the banks or the financial companies are regulated by ceiling on public deposits fixing nexus between deposits and  net-worth of the company at the ratio of 3:1, i.e. 25% of the  capital net-worth.   No  one would legitimately be expected  to  get immediate  profits or dividend without  capital  investment. The  effect  of the clause (a) and (b) of the  provision  to paragraph 6(1) of the direction, no doubt, freezes the right to  profit for a short time, and fastens an  incidental  and

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consequential  obligation  to  mop up  paid  up  capital  or investment  towards establishment and commission charges  to tide  over  teething trouble. But that is no ground  to  say that  it is impossible for compliance, nor could it be  said that the directions are palpably arbitrary or  unreasonable. Anyone  may venture to do business without any stake of  his own  but  is  subject to the  regulations.   A  new  company without any paid up capital, no doubt,cannot be expected  to come  into  existence  nor would  operate  its  business  at initial existence with profits.  Clause (c) of the provision to paragraph 6(1) of the directions gives freedom on  leeway to  invest  or  rotate,  not  more  than  20  per  cent   of collections etc. in any profitable manner at its choice as a prudent  businessman to generate its resources to tide  over the  teething  troubles till it is put  on rail  to  receive succor  to its existence, without inhibiting  the  company’s capacity to mop up small savings, and the directions do  not control  its operation.  The only rider is the  approval  of the  Board  of  Directors which  is  inherent.   Absence  of imposition of any limit on quantum of deposit with reference to  paid  up  capital  or  reserve  fund  like   non-banking financial companies, etc. is a pointer in this regard.  Thus there  is a reasonable nexus between the regulation and  the public  purpose, namely, security to the  depositors’  money and  the  right to repayment without any  impediment,  which undoubtedly is in the public interest.                                                      462      Looking  from operational pragmatism, the  restrictions though  apparently  appears  to be harsh  in  form,  in  its systematic  working,  it would inculcate discipline  in  the business  management,  subserve  public  confidence  in  the ability  of the company to honour the contractual  liability and assure due repayment at maturity of the amount deposited together  with  interest, etc, without any  impediment.   In other  words,  the  restrictions  in  paragraph  6  of   the directions intended to elongate the twin purposes, viz.habit of  thrift among the needy without unduly  jeopardising  the interest of the employees of the companies and the  R.N.B.Cs working system itself in addition to safety and due  payment of depositors’ money.  True, as contended by Shri  Chatterji that  there  arises corresponding obligation to  pay  higher amount of commission to its agents and the commitment should by kept performed and the confidence enthused in the agents. But  it is the look out of the businessman.  The absence  of ceiling on the rate of commission would give choice  between the company  and its agents to a contract in this regard and has freedom to manage its business.  The R.N.B.Cs. are  free to  incur such expenses and organize their business as  they desire  including  payment  of  commission  as  they   think expedient.   But the subscribers/depositors’liability, under no  circumstances  would be in jeopardy and  the  directions were   designed   to  ensure  that  the  interest   of   the subscribers/depositors is secured at all times,  prescribing investment  of  an equal sum to the total liability  to  the subscribers/depositors.   Paragraph  12  is  only  a  bridge between  the  depositors and the promise held  out  and  the contract executed  in furtherance thereof  as  a  monitoring myocardium  to  keep the heart in  paragraph  6  functioning without  any  hiatus.   It is settled  law  that  regulation includes  total  prohibition  in  a  given  case  where  the mischief  to be remedied warrants total  prohibition.   Vide Narendra Kumar v. Union of India, [1960] 2 SCR 375. But  the directions  do not do that but act as a siphon  between  the subscriber/depositor  and the business  itself.   Therefore, they  are neither palpably arbitrary nor unjust not  unfair.

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The  mechanism evolved in the directions is  fool-proof,  as directed by this court in first Peerles case, to secure  the interest  of the depositors, as well is capable  to  monitor the business management of every R.N.B.C.  It also, thereby, protects  interest of the  employees/field  staff/commission agent   etc.  as  on  permanent  basis  overcoming   initial convulsions.  It was intended, in the best possible  manner, to  subserve  the  interest  of  all  without  putting   any prohibition  in  the  ability  of a  company  to  raise  the deposit, even the absence of any adequate paid up capital or reserve fund or such pre-commitment of the owner, to  secure such deposits.      Thus the directions impose only partial control in  the public interest of the depositors.  The deposits invested or keep invested qua the com-                                                        463 pany  always  remained  its fund till  date  of  payment  at maturity  or premature withdrawal in terms of the  contract. The  effect  of the impugned judgment of the  Calcutta  High Court  namely redefinition of the aggregate  liabilities  as contractual  liabilities  due  and payable  would  have  the effect of requiring the R.N.B.Cs. to deposit an amount equal to  the  sum payable only in the year of  maturity  allowing free play to the R.N.B.Cs. to use the subscriptions/deposits in  its  own  manner  during  the  entire  earlier   period, jeopardise  the security of the  subscribers/depositors  and are  self-defeating.   The  sagging  mismanagement  prefaced hereinabove  would  be  perpetrated and  the  depositor  was always  at the mercy of the company with  all  disabilities, killing  the  very  goose  namely  the  thrust to  save  for prosperous future or to tide over future needs.      It  is well  settled that the court is not  a  Tribunal from   the   crudities   and   inequities   of   complicated experimental   economic  legislation.   The  discretion   in evolving an economic measures, rests with the policy  makers and  not  with the judiciary. Indian social order  is  beset with social and economic inequalities and of status, and  in our socialist secular democratic Republic, inequality is  an anathema  to social and economic justice.  The  constitution of India charges the state to reduce inequalities and ensure decent  standard  of life and economic  equality.   The  Act assigns the power to the RBI to regulate monitory system and the experimentation of the economic legislation, can best be left  to the executive unless it is found to be  unrealistic or manifestly arbitrary.  Even if a law is found wanting  on trial, it is better that its defects should be  demonstrated and removed than that the law should be aborted by  judicial fiat.    Such  an  assertion  of  judicial  power   deflects responsibilities  from  those on whom a  democratic  society ultimately rests.  The  court has to see whether the scheme, measure or regulation adopted is relevant or appropriate  to the  power  exercised by the authority.   Prejudice  to  the interest of depositors is a relevant factor.   Mismanagement or inability to pay the accrued liabilities are evils sought to  be  remedied.  The directions designed to  preserve  the right  of the depositors and the ability of R.N.B.C. to  pay back the contracted liability.  It also intended to  prevent mismanagement  of  the deposits  collected  from  vulnerable social segments who have no knowledge of banking  operations or  credit  system and repose unfounded blind faith  on  the company  with  fond  hope of its ability  to  pay  back  the contracted amount.  Thus the directions maintain the  thrift for  saving  and  streamline  and  strengthen  the  monetary operations of R.N.B.Cs.      The problems of Government are practical and do require

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rough  accommodation.  Illogical it may be and  unscientific it  may seem to be, left to its working and if need be,  can be remedied by the R.B.I. by                                                        464 pragmatic  adjustment that may be called for  by  particular circumstances.   The impugned directions may at first  blush seem  unjust  or arbitrary but when  broached  in  pragmatic perspective  the mist is cleared and that  the  experimental economic measure is manifested to be free from the taints of unconstitutionality.      Para  19 of the directions empowers the RBI  to  extend time  for compliance or to exempt a particular company or  a class  thereof  from all or any of  the  provisions,  either generally  or  for  a  specified  period  subject  to   such conditions as may be imposed.  Power to exempt would include the  power to be exercised from time to time  as  exigencies warrant.  An individual company or the class thereof has  to place  necessary  and  relevant material  facts  before  the R.B.I. of the hardship and the need for relief.  A criticism of  arbitrariness or unreasonableness may not be  ground  to undo  what was conceived best in the public interest.   What is best is not always discernible.  The wisdom of any choice may be disputed or condemned.  Mere errors of Government are not subject to judicial review.  The legislative remedy  may be  ineffective to mitigate the evil or fail to achieve  its purpose,  but it is the price to be paid for the  trial  and error  inherent  in  the  economic  legislative  efforts  to grapple  with  obstinate social issues.  It  is  proper  for interference in judicial review, only, when the  directions, regulations   or   restrictions  are   palpably   arbitrary, demonstrably  irrelevant  or  disriminatory.    Exercise  of power  then can be declared to be void under Art. 13 of  the Constitution.   So long as the exercise of power is  broadly within  the  zone  of reasonableness, the  court  would  not substitute its judgment for that of legislature or its agent as  to matters within their prudence and power.   The  court does  not  supplement  the feel of the experts  by  its  own values.      It  is  settled  law  that so  long  as  the  power  is traceable  to  the  statute  mere  omission  to  recite  the provision  does not denude the power of the  legislature  or rule   making  authority  to  make  the   regulations,   nor considered without authority of law.  Section 114 (h) of the Evidence  Act  draws a statutory presumption  that  official acts  are regularly performed and reached satisfactorily  on consideration of relevant facts.  The absence of reiteration of  objective satisfaction in the preamble as of  one  under s.45L does not denude the powers, the R.B.I. admittedly  has under  s.45L  to  justify the  actions.   Though  s.45L  was neither  expressly stated nor mentioned in the  Preamble  of the directions of the required recitation of satisfaction of objective  facts to issue the directions from the facts  and circumstances  it is demonstrated that the R.B.I.  had  such satisfaction  in its consideration of its power under  s.45L when the directions were issued .  Even otherwise s.45K  (3) itself is sufficient to uphold the directions.                                                        465      The  impugned directions are thus within the  power  of the  R.B.I.  to  provide  tardy,  stable,  identifiable  and monitorable  method of operations by each R.N.B.C.  and  its compliance of the directions.  This will ensure security  to the  depositors at all times and also make the  accounts  of the  company accurate, accountable and easy to  monitor  the working system of the company itself and continuance of  its workmen.   The directions in paragraphs 6 and 12  are  just,

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fair  and reasonable not only to the depositors, but in  the long  run  to  the very existence of  the  company  and  its continued business itself.  Therefore, they are legal, valid and constitutionally permissible.      The  Writ  Petition is dismissed and  the  appeals  are allowed.   The Writ Petitions filed in the High Court  stand dismissed.  No costs in this Court. G.N.                                     Petition dismissed                                           Appeals allowed.                                                        466