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PETITIONER: RESERVE BANK OF INDIA

       Vs.

RESPONDENT: PEERLESS GENERAL FINANCE & INVESTMENT CO. LTD.ORS. AND VICE

DATE OF JUDGMENT22/01/1987

BENCH: REDDY, O. CHINNAPPA (J) BENCH: REDDY, O. CHINNAPPA (J) KHALID, V. (J)

CITATION:  1987 AIR 1023            1987 SCR  (2)   1  1987 SCC  (1) 424        JT 1987 (1)   246  1987 SCALE  (1)100  CITATOR INFO :  R          1988 SC 492  (16)  RF         1988 SC1883  (162)  R          1992 SC  81  (12)  RF         1992 SC1033  (2,3,4,18,26,30,34,45,68)

ACT:     Interpretation of statute--Text and Context bases  value of,  explained--Whether  the  two clauses (i)  and  (ii)  in section  2(e)  of the definition of "Prize  chit"  in  Prize Chits  and Money Circulation Scheme (Banning) Act, 1978  are to  be  read disjunctively--Phrase "for all or  any  of  the following purposes", construction of.     Prize Chits and Money Circulation Scheme (Banning)  Act, 1978  section 2(e)--Definition of "prize chit"--Whether  the Endowment  Certificate  Scheme of the Peerless  Company  at- tracts the provisions of the Act.     Constitution  of  India, 1950, Articles 38, 39,  41  and 43--Goal  of minimising inequalities of  income--Failure  of the    Life   Insurance   Corporation   in    this    regard deprecated--Need to improve their efforts to devise  several methods  to  serve  the  poorer  sections  of  the   people, stressed.

HEADNOTE:     The  Peerless General Insurance and Investment Co.  Ltd. was  incorporated in 1932. After the nationalisation of  the business  of  life insurance, the name of  the  company  was changed to "the Peerless General Finance and Investment  Co. Ltd."  For over a quarter of a century now, the business  of the  company  has been that of finance and  investment.  The company offers three schemes, the principal of which is  the Endowment Certificate Scheme. Under this scheme, a subscrib- er  is  required to pay a fixed annual  subscription  for  a fixed  number  of years varying between the  minimum  of  10 years  and  the maximum of 30 years. On the  expiry  of  the period, the subscriber will be paid by the company a sum  of money  called the Endowment Sum which is the face  value  of the Certificate. The subscriber is also entitled to be  paid a  guaranteed fixed bonus. If any instalment, that  is,  any amount of annual subscription is not paid within the  stipu- lated  period  and period of grace, the  Certificate  lapses

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unless  it  has acquired a surrender  value.  A  Certificate acquires  surrender  value after the expiry of  three  years from  the date of commencement of the subscription  for  two full years has 2 been  paid. A Certificate which has not  acquired  surrender value  lapses on non-payment of instalments and the  amounts paid  become  forfeit to the company. A  lapsed  certificate may, however, be revived at any time before the expiry  date of maturity on payment of all dues together with interest at one  paisa per rupee per month. There is also  provision  in the scheme for conversion of the Certificate into a paid  up Certificate, the paid up amount to be paid at the end of the period, but without bonus. A person purchasing a Certificate automatically becomes entitled to a free accident  insurance policy under a group insurance scheme. A  noticeable  feature of the scheme is the  remarkably  low yield  to subscriber on his investment. Not only  that,  the subscriber  is always at the losing end. Despite  the  same, the message of Peerless is made to penetrate the rural areas to  tap  the small savings of the  poor  ignorant  villagers through  a  special  structure of  agents,  special  agents, suborganizers,  special  organizers and so  on  chosen  from amongst  those noted for their social political or  official connections. The agents’ Commission was 30% (now 35%) of the first  year’s subscription and 5% only of subsequent  years’ subscription. The incentive of 30% of the collection of  the subscription  of the first year automatically operates as  a disincentive  for  collecting  subscriptions  of  subsequent years  resulting in heavy default in payment and  forfeiture of  subscriptions  earlier paid. The first  subscription  is literally  shared between the company and its  agents  under the  method of accountancy adopted by the  company  treating the entire amount as income and not liability of the  compa- ny. The company adopted the "actuarial system" of accountan- cy  followed by the Life Insurance Corporation,  though  the company  itself does not and cannot do  insurance  business. However, the company has now deleted the "forfeiture clause" and  everyone  is  entitled to payment  after  the  maturity period of the certificate.     Section  45K of the Reserve Bank of India  Act  empowers the  Reserve  Bank to collect information  from  Non-Banking Institutions  as to deposits and to give directions  in  the public  interest, 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." Section 45L  empowers the Reserve Bank to call for information  from financial institutions and to give directions, in particular directions relating to the conduct of business by them, etc. Taking  advantage of the 1970 Report of the Banking  Commis- sion’s Study Group headed by Dr. Bhabatosh Dutta on the role of  various non-banking financial institutions, the  Reserve Bank  purporting to exercise its powers under  Sections  45L and 45K of 3 the Reserve Bank of India Act gave certain directions called "Miscellaneous  Non-Banking Companies (Reserve Bank)  Direc- tions 1973". Para 4(a) prescribed six months as the  minimum period  for which a Miscellaneous Non-Banking Company  could accept  a  deposit, but no maximum  period  was  prescribed. Paragraph 4(b)(ii) prescribed a ceiling of 25% of the aggre- gate of the paid up capital and free reserve of the  company in the case of deposits accepted by Miscellaneous NonBanking Companies.  Paragraph 13 enabled the Reserve-Bank to  exempt

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any  company or class of companies from, all or any  of  the provisions  of  the  directions either generally  or  for  a specified  period, if it considered necessary  for  avoiding any hardship or for any other just and sufficient reason.     On  September 14, 1973 the Peerless Company addressed  a letter to the Reserve Bank of India explaining the nature of their business and claiming that their business was  outside the  scope  of the directions issued by  the  Reserve  Bank, while  pointing out that their business was a special  type, that it was carried on scientific lines and actuarial  prin- ciples,  that  over  90% of the concerned  public  fund  was invested in Government securities and in nationalised Banks. The  Reserve Bank of India by their order dated December  3, 1973 exempted the company from the provisions of paragraph 4 of the notification in so far as those provisions restricted the acceptance of subscriptions under the scheme upto 25% of the  paid-up capital and free reserve fund.  Certain  condi- tions  were, however, imposed. The company was  directed  to transfer every year to the reserve fund a sum not less  than 50% of the profit after taxes. The company was directed  not to  declare any dividend at rates higher than 6% and  7%  on ordinary  and  preferential  shares till  the  free  reserve became  equal to the paid-up capital. The company  was  also required  to maintain not less than 75% of its total  assets in  the form of investments and  Government  Trustee-securi- ties,  etc. The company was directed to submit every year  a certificate from their Auditors in regard to compliance with the  conditions  imposed. The exemption was to  be  reviewed every  two  years. The said exemption  was  granted,  having regard  to the satisfactory financial position of the  Peer- less  and  the fact that it was a well established  one  and having regard to the certificate furnished by the  actuarial consultant of the Peerless supported by data.     In  the  year 1974, there was yet  another  Study  Group headed  by Dr. J.S. Raj appointed this time by  the  Reserve Bank. In para 6.21 the Study Group made its  recommendations for  a total ban on the conduct of prize chits of  the  kind described by them in paragraph 6.3. Simple Recurring  Depos- its Schemes were not contemplated. 4     Thereafter, as a follow up of the recommendations of the Raj Committee, in 1977 two sets of directions were issued by the  Reserve.  Bank, called  the  Miscellaneous  Non-Banking Companies (Reserve Bank) Directions, 1977 and the  Non-Bank- ing  Financial  Companies (Reserve Bank)  Directions.  1977. Paragraph  5  of  the  Miscellaneous  Non-Banking  Companies (Reserve Bank) Directions, 1977 which corresponded to  para- graph  4  of the 1973 directions, however,  made  a  radical departure from the earlier provision. For the first time,  a ceiling was fixed on the period for which deposits could  be accepted. It was provided that the period of a deposit could not be more than thirty-six months. Paragraph 14 also vasted in the Reserve Bank the power to grant exemption in suitable cases.  Paragraph  5(1)  of  the  Miscellaneous  Non-Banking Financial  Companies (Reserve Bank) Directions,  1977  dealt with period of deposits for hire-purchase finance, loan  and investment companies and provided that the period of  depos- its  shall not be less than six months or more than  thirty- six months. Paragraph 19 made the directions applicable to a loan  company also applicable to every company which  was  a "financial  institution"  but not belonging to  any  of  the categories of companies mentioned in paragraph 2(1) or which was  not  a  miscellaneous non-banking  company  within  the meaning  of the Miscellaneous Non-Banking  Companies  Direc- tions, 1977.

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   Thereafter  in  1978 the Prize Chits and Money  Circula- tion  Schemes  (Banning) Act 1978 was enacted  "to  ban  the promotion  or conduct of prize chits and money  circulations schemes  and for matters connected therewith  or  incidental thereto.   Section  2(a)  defines  "Conventional  Chits"  on practically  the same lines as the type of business  covered by the second part of paragraph 2 of the Miscellaneous  Non- Banking  Companies  (Reserve Bank) Directions 1973  and  the Miscellaneous  Non-Banking Companies (Reserve  Bank)  Direc- tions,  1977.  Section  3, banned not  merely  promoting  or conducting  any prize chit or money circulation but also  on participation  in  the Scheme of any kind  contravention  of which  carried  penal action. Section 11  exempts  from  the operation  of  the  Act prize  chits  or  money  circulation schemes  promoted  by a State Government or  any  office  or authority  on its behalf, a company wholly owned by a  State Government  which does not carry on any business other  than the conducting of a prize chit or money circulation  scheme, a  banking  institution notified by the  Central  Government under  Section 51 of the Banking Regulation Act,  the  State Bank  of  India or a subsidiary bank of the  State  Bank  of India or a corresponding new bank, a Regional Rural Bank,  a co-operative bank and any charitable or educational institu- tion  notified  in that behalf by the  State  Government  in consultation with the Reserve Bank of India. 5 There  is  no general provision which empowers  the  Central Government or the Reserve Bank of India to exempt any  other prize chit or money circulation scheme from the applicabili- ty of the Act. In exercise of its powers under Section 13 of the  Act  the Government of West Bengal has made  the  Prize Chits  and Money Circulation Scheme (Banning) (West  Bengal) Rules, 1979.     The  Miscellaneous Non-Banking Companies (Reserve  Bank) Directions  1977  and the  Non-Banking  Financial  Companies (Reserve  Bank) Directions came into force on July 1,  1977. On  March  3, 1978 the Reserve Bank  informed  the  Peerless Company  that under the Miscellaneous Non-Banking  Companies Directions  which  applied to the Company, the  Company  was prohibited  from accepting deposits for more than 36  months and  since  the deposits accepted by the  Company  were  for periods exceeding 36 months, the Reserve Bank wanted to know what action the Company proposed to take to comply with  the requirement stipulating the maximum period for which  depos- its might be accepted. In reply, the Company, by its  letter dated 31st March, 1978, pointed out the special features  of the Company which persuaded the Reserve Bank to grant exemp- tion  to the Company from the 1973 directions.  The  Company invited  the  attention of the Reserve Bank of  the  various elements of the scheme which made it impracticable to comply with  the  stipulation regarding the maximum  period  of  36 months  as that would make the scheme wholly  unviable.  The Company  requested that further exemption may be granted  in the public interest. The alternative, it was said, would  be to close the business and that would mean loss of employment to  several  thousands of employees and  financial  loss  to millions  of  depositors.  The Company  suggested  that  the Reserve  Bank might recommend to the Central  Government  to convert the undertaking into a joint-sector enterprise.  The letter  ended  with an appeal to the Reserve Bank  to  grant exemption from the restrictions relating to maximum  period. By its letter dated July 23, 1979, the Reserve Bank  pointed out to the company that the schemes conducted by the Company were covered by the provisions of the Prize Chits and  Money Circulation Schemes (Banning) Act, 1978 which had come  into

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force with effect from December 12, 1978. As the Company was banned from doing fresh business and was required to wind up its  existing business under the Act, there was no  question of  granting any exemption to the company. Nevertheless  the Reserve  Bank stated that they had considered the claim  for exemption  on  merits  and found that it  was  necessary  to cancel  the exemption already granted. The reasons  for  the proposed cancellation were set out and the Company was asked to show cause why the exemption should not be cancelled.  On August 30, 1979 6 the Company replied at great length stating how necessary it was in the public interest to grant exemption to the  Compa- ny.  On August 10, 1979, the Government of West  Bengal  ad- dressed a communication to the Peerless Company pointing out that the Prize Chits/Money Circulation Schemes conducted  by the  Company came within the purview of the Prize Chits  and Money  Circulation Schemes (Banning) Act, 1978  and,  there- fore, the Company was under an obligation to submit a  wind- ing up plan under Rule 4 of the Prize Chits and Money Circu- lation Schemes (Banning) (West Bengal) Rules, 1979.     On September 3, 1979, the Company filed a writ  petition in the Calcutta High Court for a declaration that the  Prize Chits and Money Circulation Schemes (Banning) Act, 1978  did not apply to the business carried on by the company. A  Rule was  issued and an Interim Order was made in favour  of  the company,  first  for a limited period and, later,  till  the disposal  of the writ petition. A similar writ petition  was filed  questioning  a notice issued by  the  Madhya  Pradesh Government  on  the same lines as that issued  by  the  West Bengal  Government.  A Rule and Interim Order  were  issued. During  the  pendency  of the writ  petition  exemption  was refused by the Reserve Bank on 19.3. 1980.     Appeals  preferred  by  the company  under  the  Letters Patent  against  the judgment of the Single Judge  were  al- lowed.  It was declared that the business carried on by  the company did not come within the mischief of the Prize  Chits and  Money Circulation Schemes (Banning) Act, 1978.  Against the  judgment  of the Division Bench of  the  Calcutta  High Court the Reserve Bank of India, the Union of India and  the State  of West Bengal have preferred Civil Appeal  Nos.3562, 3563,  3564,  3565 and 4459 of 1986. In the  course  of  the judgment, the Division Bench of the Calcutta High Court  had observed that the company was a financial institution within the  meaning  of paragraph 11 of the  Non-Banking  Financial Companies (Reserve Bank) Directions, 1977 and therefore, the Directions contained therein applied to the business carried on by the company. Against this observation of the  Division Bench, the Company has also preferred Civil Appeal Nos. 3566 and  3567 of 1986. After the judgment of the Division  Bench of  the  Calcutta High Court, the Company, pursuant  to  the observations  of the Division Bench that it was a  financial institution  within the meaning of paragraph 11 of the  Non- Banking  Financial Companies Directions, applied  afresh  to the Reserve Bank of India for exemption from complying  with the Directions. The Reserve Bank of India by its order dated August  22, 1986 refused to grant the exemption sought.  The company has filed another writ petition in the Calcutta High Court against the said refusal by the 7 Reserve  Bank to grant exemption. Therefore, the court  pre- ferred  to  apply "Non liquet" on the question  whether  the company  is  a financial Institution within the  meaning  of para  11  of the Non-Banking  Financial  Companies  (Reserve Bank) Directions.

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   Dismissing  the appeals of Reserve Bank of India.  Union of India and the State of West Bangal, the Court. HELD: Per Chinnappa Reddy, J.     1. 1 Legislatures resort to inclusive definitions (i) to enlarge the meaning of words or phrases so as to take in the ordinary,  popular and natural sense of the words  and  also the sense which the statute wishes to attribute to it;  (ii) to include meanings about which there might be some dispute; or  (iii) to bring under one nomenclature  all  transactions possessing certain similar features but going under  differ- ent  names.  Depending  on the context, in  the  process  of enlarging,  the  definition may even become  exhaustive.  By using the word, the Legislature did not intend to so  expand the meaning of prize chit as to take in every scheme involv- ing subscribing and refunding of money. The word "includes", the context shows, was intended not to expand the meaning of "prize  chit" but to cover all transactions or  arrangements of the nature of prize chits but under different names.  The expression "Prize chit" had nowhere been statutorily defined before.  The Bhahatosh Datta Study Group and the  Raj  Study Group  had indentified the schemes popularly  called  "Prize Chits".  The Study Group also recognised that "Prize  Chits" were also variously called benefit/savings schemes and lucky draws and that the basic common features of the schemes were the giving of a prize and the ultimate refund of the  amount of  subscriptions  (vide para 6.3 of the report of  the  Raj Study  Group). It was recommended that prize chits  and  the like  by whatever name called should be banned. Since  prize chits  were called differently, "prize chits" benefit/  sav- ings  schemes, "lucky draws", etc. it became  necessary  for the  Parliament to resort to an inclusive definitions so  as to  bring  in all transactions  or  arrangements  containing those two elements. In defining the expression "prize  chit" the  Parliament  did not intend to depart from  the  meaning which  the  expression had come to acquire in the  world  of finance,  the  meaning  which the Datta and  the  Raj  Study Groups had given it. [42D-H;43A-B]     1.2  Interpretation  must  depend on the  text  and  the context. They are the bases of interpretation. One may  well say  if the text is the texture, context is what  gives  the colour. Neither can be ignored. Both 8 are  important. That interpretation is best which makes  the textual  interpretation match the contextual. A  statute  is best  interpreted when the object and purpose of its  enact- ment  is  known. With this knowledge, the  statute  must  be read,  first as a whole and then section by section,  clause by  clause, phrase by phrase and word by word. If a  statute is  looked  at, in the context of its  enactment,  with  the glasses  of the statute maker, provided by such context  its scheme,  the sections, clauses, phrases and words  may  take colour and appear different than when the statute is  looked at  without the glasses provided by the context. With  these glasses  the court must look at the Act as a whole and  dis- cover  what each section, each clause, each phrase and  each word is meant and designed to say as to fit into the  scheme of  the  entire Act. No part of a statute and no word  of  a statute  can be construed in isolation. Statutes have to  be construed  so that every word has a place and everything  is in its place. It is by looking at the definition as a  whole in  the setting of the entire Act and by reference  to  what preceded the enactment and the reasons for it that the court construed the expression "Prize Chit" in Srinivasa. [43B-F]     1.3 Therefore, the two requirements mentioned in the two clauses  (i) and (ii) of the definition are not to  be  read

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disjunctively;  they are two distinct attributes  of  "Prize Chits", each of which has to be satisfied. The  Conventional Chit  satisfies both the requirements of the  definition  of "Prize  Chit", since it involves both the "certain" and  the "chance"  elements, the certain element being the refund  of the  amount  of subscriptions less the  deductions  and  the chance element being the time of such payment, dependent  on the  result  of the draw or auction. Yet the  definition  of "Prize Chit" expressly excludes the Conventional Chit  obvi- ously for the reason that the "chance" element is  overshad- owed by the "certain element". If so, no construction may be placed  on  the definition so as to bring in  all  Recurring Deposit  Schemes, even if they do not involve a chance  ele- ment.  Such a construction would reduce the definition to  a near  absurdity  and render the reference to the  giving  or awarding of a prize or girl, a meaningless superfluity. If a conventional chit is not a "Prize Chit" by definition  there appears  to  be  no logic in construing  the  definition  to include a Recurring Deposit Scheme. [43H;44A-D]     2. The argument that the two clauses (i) and (ii) are to be read disjunctively and that they should not be read as if they are joined by the conjunction "and" cannot be accepted. There  is  no need to introduce the word  "or"  either.  How clauses  (i) and (ii) of s.2(e) have to be read  depends  on the context. The context requires the definition to be  read as  if both clauses are satisfied. There is nothing  in  the text which 9 makes  it imperative that it be read otherwise. Each of  the clauses  (i) and (ii) contains a number of alternatives  and it is to those several alternatives that the expression "all or  any of the following purposes" refers and not to (i)  or (ii)  which  are not alternatives at all. In fact,  a  prize chit,  by whatever name it may be called, does  not  contem- plate  the  exhaustion of the entire fund by the  giving  of prizes; it invariably provides for a refund of the amount of subscription, less the deductions, to all the subscribers or to those who have not won prizes, depending on the nature of the  scheme.  Clauses  (i) and (ii) refer to  the  twin  at- tributes  of  a  prize chit or like scheme and  not  to  two alternate attributes. [44D-G]     2.2 While it is possible to say that Parliament  desired to root out prize chits and schemes of like nature involving the  vicious element of gambling, it is  inconceivable  that Parliament  intended to visit even subscribers to  Recurring Deposit Schemes involving no such vice with such dire conse- quence. Therefore, section 2(e) of the Act does not  contem- plate a scheme without a prize, and therefore, the endowment certificate  scheme of the Peerless Company is  outside  the Prize  Chits  and Money Circulation  Scheme  (Banning)  Act, 1978. [45A-B;E]     Srinivasa  Enterprise  v. Union of India, [1981]  1  SCR 801; Ardeshir Bhiwandiwala v. State of Bombay, [1961] 3  SCR 692; C.I.T. Andhra Pradesh v. Taj Mahal Hotel, [1972] 1  SCR 168;  and S.K. Gupta v.K.P. Jain, [1979] 4 SCC 54,  referred to.     3.  Despite Articles 38, 39, 41 and 43 of the  Constitu- tion the Life Insurance Corporation of India, an  instrumen- tality  of  the State, which is given the monopoly  of  Life Insurance  business  in the country has taken  no  steps  to offer  proper  security and protection to the  needy,  poor, rural  folk.  If the Life Insurance  Corporation  is  really interested  in the treating the poorer  policy-holders  less harshly  and more liberally the time has come for  the  Life Insurance Corporation to revise its terms and conditions and

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to think in the direct/on of deleting the forfeiture  clause altogether  as has now been done by the Peerless Company  or to delete it at least from life policies for small  amounts. Perhaps  the Life Insurance Corporation may think  of  short term,  small amount policies with no forfeiture  clause  and with some incentive such as a reduced premium for continuing to pay premiums regularly. It is hoped, with the  management expertise at its command, the Life Insurance Corporation  of India  can devise a myriad ways of serving the  poorer  sec- tions of the people of our country, as also to tap the  huge untapped Savings resources, the existence of which has  been brought  home by companies like the Peerless  however  wrong headed their business methods might 10 be. It is a matter of common knowledge that the return to  a policyholder  who survives the period of the policy is  very poor. It may be true that the Life Insurance Corporation  is paying higher bonus year after year but the bonus comes  out of  the amounts of the forfeited policies and it means  that it is really the poor class of policy holders whose policies are forfeited that are paying bonus to the class of  policy- holders  who  are  better off. This surely is  not  what  is contemplated  by Art. 38(2) of the Constitution which  talks of  minimising the inequalities in income, not only  amongst individuals but also amongst groups of people and Art. 39(c) which requires the State to secure that the operation of the economic  system  does not result in  the  concentration  of wealth  and  means of production to  the  common  detriment. [18F-H; 19A-D] Per Khalid, J.     A  close  study of the definition makes  the  conclusion inescapable  that the Peerless scheme does not  come  within it.  Any  attempt to bring the activities  of  the  Peerless within  the  definition has only to fail. It  would  not  be proper  to  refer to the observations in  the  judgment,  in Srinivasa’s  case,  on  section 2(e) of the  Act  either  as obiter or per incuriurn. [11G]     When the activities of the Peerless and the Life  Insur- ance  Corporation are considered juxtaposed, one is  tempted to observe that Peerless is less harsh than the Life  Insur- ance Corporation. The Life Insurance Corporation enjoys many privileges.  It has a duty to be above suspicion. It  has  a duty to serve people in the right manner. The Life Insurance Corporation should at least in future be liberal and  gener- ous when claims are made by those unfortunate few, who  when robbed  of their bread earners claim for the insured  amount and who are invariably met on technical pleas of concealment of ailment and the like. The Life Insurance Corporation does not  come out with glory when some of its dealings are  con- sidered. [12B-D]

JUDGMENT:     CIVIL  APPELLATE JURISDICTION: Civil Appeal Nos. 3562  & 3563 of 1986 etc.     From the Judgment and order dated 23-5-86 of the Calcut- ta High Court in F.M.A.T. No. 824 and 825/86     K. Parasaran, Attorney General, G. Rama Swamy, Addition- al Solicitor General, S..Roy Chowdhary, Som Nath Chatterjee, S.N.  Kacker, A.K. Ganguli, Sankar Ghosh, N.N. Gooptu,  T.K. Banner- 11 jee, A.K. Sil, H.S. Parihar, A. Mitra, G. Joshi, S. Roy,  A. Subba  Rao,  P.  Parmeshwaran, Bhaskar Gupta,  P.  Basu,  A.

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Chatterjee, B. Lehari, S. Sukumaran, Dilip Sinha, J.R.  Das, K.R. Nambiar, H.K. Puri, P.K. Pillai, S.K. Jain and J.R. Das for the appearing parties. The Judgments of the Court were delivered: following     KHALID,  J. I agree with my learned brother in his  con- clusion. However, I would like to add that short post-script of my own.     In  the main Judgment the sinister aspects of the  Peer- less scheme have been brought out in great detail as well as the  improvements attempted. What disturbed me most was  the plight  of the innumerable subscribers who lose their  money by  the operation of the scheme under consideration. When  I say this, I feel concerned of those situated far and wide in the  remote  villages of the country, uninitiated  into  the mysteries  of financial schemes, who are lured by the  prom- ises of easy money and decide to pay the first instalment by the encouraging words of the agents, who forget them  there- after, because of the disincentive commission they get after the first instalment is paid, who, therefore, do not  pursue these depositors to make subsequent deposits promptly. It is some  consolation  that the Peerless is trying to  bring  in reforms to reduce some of the vicious aspects of its scheme. While referring to the plight of the depositors I do not  at the same time ignore the large number of employees  employed by the company.     The  only reason why the appeals are being dismissed  is on the wording of Section 2(e) of the Act. A close study  of the  definition  makes the conclusion inescapable  that  the Peerless  scheme  does not come within it.  Any  attempt  to bring  the activities of the Peerless within the  definition has only to fail. This position gets support from two  Judg- ments  rendered  by benches of three Judges  of  this  Court viz.,  Srinivasa  Enterprises and others v. Union  of  India etc.,  [1981] 1 SCR 80 1 and State of West Bengal v.  Swapan Kumar  Guha., [1982] 1 SCC 561. Any attempt  to  distinguish the  ratio of these two cases for the purpose of  these  ap- peals  cannot succeed. In the case of Srinivasa  Enterprises this  Court was considering the identical section. I do  not think  it  would be proper to refer to the  observations  in this Judgment on this section either as obiter or per  incu- rium. The position canvassed before us thus strictly is  not res-integra  and  is covered by these  two  Judgments,  more particularly in Srinivasa Enterprises. Life Insurance Corporation is not a party before us. But its 12 activities in certain spheres were brought to our notice  by the learned counsel for the appellants. The Reserve Bank  of India  is  the main appellant. The Union of  India  and  the State  of West Bengal have in tandem supported  the  Reserve Bank  of India against the Peerless. When the activities  of the Peerless and the Life Insurance Corporation are  consid- ered juxtaposed, one is tempted to observe that Peerless  is less  harsh  than the Life Insurance Corporation.  The  Life Insurance Corporation enjoys many privileges. It has a  duty to be above suspicion. It has a duty to serve people in  the right  manner. I am constrained to observe from  my  experi- ence,  that  I  have found the  Life  Insurance  Corporation heartless whenever claims are made against it. I fully agree with  the observations made by my learned brother  regarding some  of  the  aspects of  the  Life  Insurance  Corporation schemes. I wish only to emphasise that the L.I.C. should  at least in future be liberal and generous when claims are made by  those  unfortunate few, who when robbed of  their  bread earners claim for the insured amount and who are  invariably

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met  on technical pleas, of concealment of ailment  and  the like. The Life Insurance Corporation does not come out  with glory  when  some of its dealings are considered. I  do  not think it would be proper to make more harsh reference  about the Life Insurance Corporation when it is not a party before us.  1  felt it necessary to make these  observations,  with utmost  restraint, since an opportunity afforded  itself  in this case.      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 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 neces- sary for the authorities to evolve 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  enter- prises who pose themselves as benefactors of people.      CHINNAPPA  REDDY  J. The question is "Is  a  prize-less chit a prize chit?" So posed the answer appears to be  self- evident. That is what it is in the ultimate analysis.      ’The Peerless General Insurance & Investment Co.  Ltd.’ was  incorporated in 1932. After the nationalisation of  the business  of  life  insurance the name of  the  company  was changed to ’the Peerless  General Finance & Investments  Co. Ltd.’ For over a quarter of a 13 century  now, the business of the company has been  that  of ’finance  & investment’. The company offers  three  schemes, the principal of which is the Endowment Certificate  Scheme. Under  this scheme, a subscriber is required to pay a  fixed annual  subscription  for a fixed number  of  years  varying between the minimum of 10 years and the maximum of 30 years. On the expiry of the period, the subscriber will be paid  by the company a sum of money called the Endowment Sum which is the  face value of the Certificate. The subscriber  is  also entitled  to be paid a guaranteed fixed bonus. For  example, an annual subscription of Rs.77 for 10 years will fetch  the subscriber  at  the end of the 10 year period a sum  of  Rs. 1,000 as endowment sum and a sum of Rs. 100 as bonus, making a total of Rs. 1,100. If any instalment, that is, any amount of  annual  subscription is not paid within  the  stipulated period and period of grace, the Certificate lapses unless it has  acquired  a  surrender value.  A  Certificate  acquires surrender  value  after the expiry of three years  from  the date of commencement if the subscription for two full  years has been paid. A Certificate which has not acquired  surren- der  value  lapses  on non-payment of  instalments  and  the amounts paid become forfeit to the company. A lapsed certif- icate may, however, be revived at any time before the expiry date of maturity on payment of all dues together with inter- est  at one paisa per rupee per month. There is also  provi- sion in the scheme for conversion of the Certificate into  a paid  up Certificate, the paid up amount to be paid  at  the end of the period, but without bonus. A person purchasing  a Certificate  automatically becomes entitled to a free  acci- dent insurance policy under a group insurance scheme.     A noticeable feature of the scheme is the remarkably low yield  to the subscriber on his investment. In  the  example that we gave we said a subscriber investing Rs.77 every year for  ten  years will get, at the end of the  tenth  year,  a return of Rs. 1000 by way of ’Endowment Sum’ and Rs. 100  as bonus.  Treating  the total sum of Rs. 1,100 as  the  amount which the investor gets back on his ten-year annual  invest-

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ment  of  Rs.77, the yield on his investment  works  out  at compound interest of about 6% or simple interest of a little over  7%. This is on the assumption that he does not  commit default  but  pays his annual  subscription  regularly.  But consider what happens to the investments of those who commit default;  a  subscriber who defaults in  payment  of  annual subscription  after payment of the first subscription,  for- feits the subscription previously paid by him. A  subscriber who  pays  the first two subscriptions but  commits  default thereafter is entitled to have a refund of the subscriptions paid by him but only at the end of the full endowment  peri- od.  That is to say, the amount invested by  the  subscriber upto the 14 time  of default will be with the company, earning  interest for the company but nothing for the subscriber himself.  The subscriber  who commits default after payment of two  annual subscriptions  is entitled to have the surrender value  paid to  him  after the expiry of three years from  the  date  of commencement.  The surrender value is 90% of  the  subscrip- tions  paid by him excluding the first year’s  subscription. In  other words, if a subscriber who commits  default  after payment  of  two subscriptions opts  for  immediate  payment after three years he forfeits his first year’s  subscription and 10% of the subsequent years’ subscription. On the  other hand, if he opts for payment at the end of endowment  period he  will get a refund of the subscriptions paid by  him  but without  interest and without bonus. If he  commits  default after paying three years’ subscription but opts for  payment at  the end of the Endowment period he will get back a  pro- portionate  part  of the Endowment Amount and  this  without bonus.  The yield will be very much lower than the  6%  com- pound  interest  or  7% simple interest  that  we  mentioned earlier. The subscriber is always at the losing end. It is a perfect case of ’Heads I win, tails you lose’.     At this stage, it may be useful to refer to the business practices and the working results of the company. The compa- ny  advertises  its schemes widely in beguiling  terms.  The public  are  told, "The schemes are open to  any  person  of Indian Nationality without any restriction of caste,  creed, sex,  age or health, excepting physical  disabilities,  such as,  loss of limbs, dumbness, deafness, or blindness".  They are  further told, "Investment under the Schemes  is  highly profitable  and  the return  is sure and guaranteed  by  the Company. There is no element of uncertainty in the  matter"; "the  terms  and conditions of the Certificate  are  simple, liberal   and   attractive"   ,"No   trouble   of    Medical Examination"; "Unique advantage of saving as well as earning decent profit" etc. A virtual publicity blitz is carried  on in the daily and weekly newspapers: "Peerless-an epitome  of absolute  security",  "Save for your  dear  ones",  "Savings through  Peerless  means  savings for the  progress  of  the Nation", "Peerless team works today for India’s happy tomor- row",  "Save through peerless for national welfare",  "Peer- less the choice of the millions" etc.     The  message of Peerless is made to penetrate the  rural areas to tap the small savings of the poor ignorant  villag- ers  through a special structure of agents, special  agents, sub-organizers,  organizers, special organizers and  so  on. This  field  staff appears to be chosen  for  their  social, political  or official connections. What is of  significance is  that  an agent’s commission is 30% of the  first  year’s subscription and 5% 15 only of subsequent years’ subscriptions. Straightaway,  this

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offers an incentive to the agents to concentrate on securing fresh  business and a disincentive to collect  subscriptions of  subsequent  years. It is common  experience  and  common knowledge that most rural folk particularly those  belonging to  the poorer sections of people will not pay  ,their  sub- scription  regularly  unless somebody takes the  trouble  of collecting  their subscriptions from them showing  the  same enthusiasm in doing so as was shown in enrolling subscribers and collecting the first subscription. The incentive of  30% of  the  collection of the subscription of  the  first  year automatically  operates  as a  disincentive  for  collecting subscriptions  of subsequent years. The results show it  and perhaps  it is intended to be so. As we have  already  seen, default after the payment of the first subscription  results in  forfeiture of the first year’s subscription.  The  first subscription is literally shared between the company and its agents  and  one need not wonder that under  the  method  of accountancy  adopted by the Company it is treated as  income and not as a liability of the company. We are told that  the company  has adopted the ’actuarial’ system  of  accountancy followed  by the Life Insurance Corporation. Though we  note here that the business of the Life Insurance Corporation  is insurance business and therefore different from the business of the company, we will have more to say about the  policies of  the Life Insurance Corporation a little later.  For  the present  we note that the company does not and cannot  carry on any insurance business and that it accepts no risk.     Let  us now take a brief look at the result of  the  at- tractive incentive given to the agents to collect the  first year’s  subscription. A compilation prepared by the  Reserve Bank  of India which is found at page 457 of the paper  book shows  that  the first year’s subscription credited  to  the profit  and loss account during the years 1978, 1979,  1980, 1981, 1982, 1983, and 1984 was 17, 16, 27.59, 48.07,  85.70, 129.23,  129.50 and 126.47 lakhs, while the commission  paid to  the  field force during those years  was  13.23,  21.73, 39.07, 69.82, 95.21, 95.17 and 93.92 lakhs respectively  and the  renewal  subscription collected during  the  years  was 12.50,  15.95, 22.32, 33.34, 57.79, 80.35 and  101.40  lakhs respectively.     The  striking fact that stares at us is that out of  the total  deposits  collected  during the years  1978  to  1984 amounting  to  Rs.887.37  lakhs, a sum  of  Rs.563.72  lakhs represents  collections  of  first  year  subscriptions  and 323.65 lakhs represents subsequent years’ collections. First subscriptions  far  outweigh  renewal  subscriptions.   This feature  almost  becomes sinister if we  remember  that  the renewal subscriptions relate 16 not  to  a single year’s certificates  but  to  certificates issued  during  the 10,20,30 years periods previous  to  the very  relevant year corresponding to 10,20,30 year  certifi- cates  as the case may be. This clearly indicates  that  the majority  of the subscribers commit default after the  first year  and only a few of the depositors continue  their  sub- scriptions and keep alive the certificates. This gives us an indication as to the class of depositors who are principally contacted  and  are  perhaps intended to  be  so  contacted. Having regard to the class of depositors and the  incentives offered  to agents for securing fresh business, neglect  and default  of renewal subscriptions is an  inevitable  result. The agents are interested in securing fresh business because of  the High rate of commission in regard to fresh  business and  are loath to waste their time on collecting  subsequent years’ subscriptions fetching far less commission.

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   We  are told that the terms of the scheme have now  been revised and the forfeiture clause has been altogether delet- ed  with the result that even a subscriber who  commits  de- fault  after the first year’s subscription becomes  entitled to  get a refund of the amount at the end of  the  endowment period.  While  this may be an improvement on  the  original scheme,  we  find  that agents are even now  entitled  to  a commission  of  35% of the first year’s  subscription.  This continued  incentive for fresh business will naturally  lead to  the  same result as before, that is, it  will  encourage agreements  to continue to concentrate on  collecting  first year’s  subscriptions  to the total  neglect  of  subsequent years’ subscriptions.     At this point we may refer to one of the schemes market- ed by the Life Insurance Corporation of India which  appears to  be  familiarly known in circles connected  with  deposit schemes  as ’Table No. 21 Policy’. We are referring to  this policy as it was argued before us that the endowment  scheme of the Peerless Company is better conceived in the interests of the investors than the ’Table No. 21 Policy’ of the  Life Insurance Corporation and yet no one has thought of stopping the  Life Insurance Corporation of India from marketing  the Policy.  For a better appreciation of the submissions  which we will consider at a later stage, we desire to set out  the details  of the Policy at this juncture itself in  order  to compare it with the Endowment Scheme of the Peerless  Compa- ny.  Two things have to be straightaway noticed, first,  the ’Table No. 21 Policy’ offered by the Life Insurance Corpora- tion  is not a life Insurance policy, as we  generally  know it,  second,  it  is a policy without  profits.  Under  this policy  no one need undergo medical examination and  no  one would be unacceptable for reasons of health only. 17 These  two  features are common to  the  Peerless  Endowment Scheme  and the ’Table No. 21 Policy’. Under the Policy  the sum assured is payable on the policy holder’s surviving  the endowment term. No bonus is payable. To secure payment of  a sum of Rs. 1,000 at the end of 10 years, the annual  premium to be paid is of Rs.83.90. If the policy holder dies  during the first year of the policy 80% of the amount of the premi- um  will be paid to the heirs. If he dies during the  second year of the policy 90% of all the premiums will be paid.  If he  dies  during  the third year of the  policy,  the  total amount of all the premiums will be paid. If the death occurs after  the  third policy-year the total amount  of  all  the premiums paid together with compound interest at 21/2 % will be paid. If a person commits default in payment of  premiums after the expiry of three years, having paid the full premi- ums in the meanwhile, the policy becomes automatically  paid up for a reduced amount bearing the same ratio to be assured sum as the number of premiums paid bears to the total number stipulated in the policy. If default is committed within the first  three policy years, the amounts of premium  paid  are forfeited. We do not have the slightest doubt that the terms of the ’Table No. 21 Policy’ of the Life Insurance  Corpora- tion are very stringent and much more to the disadvantage of the subscriber than the terms of the endowment scheme of the Peerless  Company. We are told that the scheme is  primarily devised to enable the subscribers to get tax-benefits  under various  fiscal enactments. Whetever it is, it is  certainly not intended to tap the savings of the rural poor nor is  it designed to benefit them. In fact, we find on an examination of some of the Life Assurance Schemes, which we were invited to do by the learned counsel, that the terms of the policies are  heavily loaded against the poorer policy  holders.  The

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Manual  for Agents describes the Endowment Assurance  Policy (Tables 11, 14, 47 and 48) as the most popular form of  Life Assurance  as  it  is supposed to make  ’provision  for  the family of the Life Assured in the event of his early  death’ and also ’assures a lumpsum at any desired age’. Now,  under this  Policy, if payment of the annual premium ceases  after at least three years’ premiums have been paid, a free  paid- up  Policy for an amount bearing the same proportion to  the sum assured as the number of premiums actually paid bears to the total number stipulated in the Policy, will be automati- cally secured. The amount, of course, will be payable at the end of the Endowment period only. What is important is  that if  the Policy-holder commits default and does not  pay  any one  of the first three premiums the premiums  already  paid automatically stand forfeited to the Life Insurance Corpora- tion, entitling the Policyholders to no benefit. Since it is the  poorer class of Policy-holders that may  ordinarily  be expected to commit default in payment of 18 premiums,  the  forfeiture  clause,  in  practice,  operates harshly, specially against that class, the very class  which requires  greater security and protection. A perusal of  the ’Report and Accounts’, of the Life Insurance Corporation for the  years  ending March 31, 1983 and March 31,  1985  which have  been placed before us shows that while  22,31,385  and 26,99,654  new policies were issued respectively during  the two  years the number of policies which lapsed or were  for- feited  were respectively 74,44,22 and 82,71, 19.  Thus  the number of policies which lapse or are forfeited are  roughly thirty  percent the number of new policies issued  during  a year.  An analysis of the lapsed and forfeited  policies  is also  given  in the Reports. From the report  for  the  year ending  March  31,  1983, we see that out  of  the  74,44,22 lapsed  and forfeited policies, 43,70,04 were issued in  the first  year previous to the year under review,  1,98,949  in the 2nd year previous to the year under review and 83950  in the  3rd  year previous to the year under review.  From  the report  for the year ending March 31, 1985, we see that  out of  the 82,71, 19 lapsed and forfeited Policies,  46,  19,80 were  issued  in the first year previous to the  year  under review, 23,59,94 were issued in the second year previous  to the year under review and 99,589 in the third year  previous to  the year under review. We also notice that in the  poli- cies issued earlier than the third year before the  reviewed year  lapses or forfeitures were negligible. Thus we  notice that  the incidence of lapsing or forfeiture of policies  is highest and of a high order in the first three years after a policy  is issued. It does not require much  imagination  to see  that the victims of the forfeiture clause in the  poli- cies  are bound to be persons belonging to the  poorer  sec- tions  of  the people. It does not appear that  any  special efforts  are made by the Life Insurance Corporation to  per- suade the poorer policy-holders not to allow their  policies to  lapse  or be forfeited ’after paying one, two  or  three premiums. The incentives to agents appear to be for securing fresh business and not for continuing old policies.     We  cannot help but feel distressed that  despite  Arts. 38,  39, 41 and 43 of the Constitution, the  Life  Insurance Corporation of India, an instrumentality of the State, which is  given  the monopoly of Life Insurance  business  in  the country  has  taken no steps to offer  proper  security  and protection  to  the  needy, poor, rural folk.  If  the  Life Insurance  Corporation is really interested in treating  the poorer  Policy-holders less harshly and more  liberally  the time  has come for the Life Insurance Corporation to  revise

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its  terms and conditions and to think in the  direction  of deleting  the forfeiture clause altogether as has  now  been done  by the Peerless Company or to delete it at least  from policies  for  small  amounts. Perhaps  the  Life  Insurance Corpora- 19 tion may think of short term, small amount policies with  no forfeiture clause and with some incentive such as a  reduced premium  for  continuing to pay premiums regularly.  We  are sure  that with the management expertise at its command  the Life Insurance Corporation of India can devise a myriad ways of serving the poorer sections of the people of our country, as  also  to tap the huge untapped  Savings  resources,  the existence  of which has been brought home by Companies  like the  Peerless  however wrong headed their  business  methods might be. It is a matter of common knowledge that the return is a policy-holder who survives the period of the policy  is very  poor.  We are now told daily that the  Life  Insurance Corporation is paying higher bonus year after year. But  the learned  counsel for Peerless charges that the  bonus  comes out of the amounts of the ferfeited policies and that it  is really  the poorer class of defaulting policy-holders  whose policies are forfeited that are paying bonus to the class of Policy-holders who are better of. One wonders if this is not so This surely is not what is contemplated by Art. 38(2)  of the Constitution which talks of minimising the  inequalities in  income,  not only amongst individuals but  also  amongst groups of people and Art. 39(c) which requires the State  to secure  that the operation of the economic system  does  not result  in the concentration of wealth and means of  produc- tion to the common detriment.     In 1964, by Central Act No. 55 of 63 the Reserve Bank of India  Act  was amended by the addition of Chapter  III  (B) consisting of Sections 45H to 45Q. The title of the  chapter is "Provisions relating to Non-Banking Institutions  receiv- ing  deposits  and Financial Institutions."  Section  45I(c) defines Financial Institution as follows:-               "’Financial Institution’ means any non-banking               institution  which carries on as its  business               or part of its business or any of the  follow-               ing activities, namely:-                     (i)  the  financing, whether by  way  of               making loans or advances or otherwise, of  any               activity other than its               OW I1:                     (ii)  the acquisition of shares,  stock,               bonds,  debentures or securities issued  by  a               Government  or local authority or  other  mar-               ketable securities of a like nature;                     (iii) letting or delivering of any goods               to a hirer under a hire-purchase agreement  as               defined  in  clause(c)  of section  2  of  the               Hire-Purchase Act, 1972;               20               (iv) the carrying on of any class of insurance               business;                     (v) managing, conducting or supervising,               as foreman, agent or in any other capacity, of               chits or kuries as defined in any law which is               for  the time being in force in any State,  or               any business, which is similar thereto;                     (vi)  collecting,  for  any  purpose  or               under  any scheme or arrangement  by  whatever               name  called, monies in lumpsum or  otherwise,               by  way of subscriptions or by sale of  units,

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             or  other instruments or in any  other  manner               and 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 person; but does not include any institution, which:                     (i) is an industrial concern as  defined               in  clause(c) of section 2 of  the               Industrial  Development  Bank  of  India  Act,               1964, or               (ii) carries on as its principal businees :--               (a) agricultural operations; or               (b)  the purchase or sale of any goods  (other               than  securities)  or  the  providing  of  any               services; or               (c)  the  purchase, construction  or  sale  of               immovable  property,  so,  however,  that   no               portion  of the income of the. institution  is               derived  from  the  financing  of   purchases,               constructions  or sales of immovable  property               by other persons;               (d)  "firm"  means a firm as  defined  in  the               Indian Partnership Act, 1932;               (e) "non-banking institution" means a company,               corporation, (or co-operative society)"     Section  451(e)  defines  ’Non-Banking  Institution’  as meaning  ’a company, corporation, or co-operative  society’. Section 45K empowers the Reserve Bank to collect information from  Non-Banking  Institutions as to deposits and  to  give directions in the public interest, 21 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.’ Section 45L  empowers  the Reserve Bank to call for information from financial institu- tions  and  to  give directions,  in  particular  directions relating to the conduct of business by them, etc.     In 1970 the Banking Commission constituted a Study Group headed by Dr. Bhabatosh Dutta to review the role of  various nonbanking  financial intermediaries. The Study  Group  con- fined  their study to five classes of  Finance  Institutions which  they considered were important Non-Banking  Financial Institutions. They were:- 1. Hire Purchase Finance Institutions; 2. Investment Companies; 3. Chit Funds/Kuris; 4. Nidhis or Mutual Benefit Funds; and 5. Finance Corporations.     Proceeding to consider Chit Funds and their working, the Study  Group  identified three classes of  Chit  Funds:  (a) Simple  Chits, (b) Prize Chits and (c) Business  Chits.  The main  features of the three classes of Chits were  then  de- scribed in the following terms:-               "(a) Simple Chits                         In the ’simple chit’, members  agree               to contribute to the fund a certain amount  at               regular intervals. Lots are drawn periodically               and  the  member  whose name  appears  on  the               ’chit’  gets  the periodical  collection.  His               name is then removed from the subsequent lots;               he,  however, has to continue to pay his  sub-               scriptions. Thus, every member gets the  whole               of  the chit amount by tums. There is no  loss               of  capital. Also there is no foreman or  even

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             if there is one he does not charge any commis-               sion.  This is a form of mutual help  and  co-               operative effort at savings.               (b) Prize Chits                         In  the  ’prize chit’,  there  is  a               foreman  who ostensibly charges no  commission               and promises to return the whole of               22                     the contributions made by a member  back               to him at the end  of a certain period.  Peri-               odically,  the names of  ’non-prized’  members               are put to draw and the lucky member gets  the               prize  either  in cash or in the  form  of  an               article of jewellery or utility. Once a person               gets a prize, he does not have to pay  further               instalments.  The  lucky member will  get  the               prize  irrespective of the number  of  instal-               ments he has paid provided all the due instal-               ments till the drawal of prize have been paid;               he   will  then  be  exempted   from   further               liability to pay. On the contrary the majority               of  the  mem      bers may not  have  got  the               prize when the scheme closes      though  they               get back their total contributions without any               deduction or its equivalent in the shape of an               article.  This  is a scheme which  is  nothing               short  of a lottery which is  an       offence               punishable  under Section 294-A of the  Indian               Penal  Code. The name ’Chit Fund’ is rather  a               misnomer in      this case.                       (c) Business Chits                         In  this case, there is  a  promoter               called  foreman  who enrols a number  of  sub-               scribers  and draws up the terms  and   condi-               tions  of the scheme in the form of an  agree-               ment.       Every  subscriber has to  pay  his               subscription in regular      instalments.  The               foreman  charges,  for  his  service,  a   com               mission  on which there is a ceiling fixed  by               law in some      States. He also reserves  the               right  to take the entire chit      amount  at               the  first  or  second  instalment  as  prize.               Depend       ing on the terms of agreement,  a               fixed  amount  is also  some-       times  set               aside  for distribution among  the  non-prized               mem-      bers. After making provision for the               above  deductions the      balance is  put  to               auction  (except at the last  instalment)  and               given  as prize to the member who is  prepared               to  forgo the highest discount. The amount  of               discount  is  distributed as  dividend  either               among  all  the  members  or  only  among  the               non-prized  members. In some States a  ceiling               has  been      fixed on the  discount  that  a               member  can offer. In case more      than  one               person is prepared to offer the same  discount               or       when there are no bidders,  lots  are               drawn to choose the      prize winning member.               The   number   of  subscribers   in   a   chit               series  equals  the number of  instalments  so               that  every       member  is  assured  of  the               opportunity  of getting the prize.       Some-               times  with  a  view to catering  to  as  many               subscribers as               23

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             possible a chitty comprises a series expressed               in  terms of a sub-division or fraction  of  a               full  ticket  (ticket  means the  share  of  a               subscriber  which entitles the holder  thereof               the  prize amount at any one  instalment).  In               such  cases  the  number  of  subscribers  can               exceed  the  number of  instalments.  In  some               cases only auctions are held to determine  the               prize  winner  while there are chit  funds  in               which  prize  winning tickets  are  determined               both by lots and by auction". The  Study Group’s view was that Chit Funds were  not  effi- cient  as saving or lending institutions and that  they  en- couraged consumption spending and in some cases hoarding  of scares commodities. The major reason of their popularity was stated  to  be ignorance of the risk and  the  disadvantages involved. The ultimate solution, they said, lies in  Commer- cial Banks weaning away the Chit Fund subscribers by  offer- ing attractive deposit and credit schemes. In the meanwhile, it was suggested that elimination of Chit Funds would  leave credit gap and therefore, they should be regulated by appro- priate  legislation to ensure safeguarding the  interest  of members  and  prevent  the foreman from  enjoying  the  wide powers that they did at that time.     Shortly  after  the report, the Reserve  Bank  of  India purporting  to exercise its powers under ss.45J and  45K  of the Reserve Bank of India Act gave certain directions called "Miscellaneous  Non-Banking Companies (Reserve Bank)  Direc- tions, 1973". Paragraph 2 of the directions stated:-               "Extent of the Directions:               These  directions  shall apply to  every  non-               ban.king institution, which is a company,  not               being  a banking or an insurance company,  and               which carries on any of the following types of               business:-               (1) collecting whether as a promoter, foreman,               agent or in any other capacity, monies in  one               lump sum or in instalments by way of contribu-               tions,  or subscriptions or by sale of  units,               certificates  or other instruments or  in  any               other  manner or as membership fees or  admis-               sion fees or service charges to or in  respect               of any savings, mutual benefit, thrift, or any               other  scheme or arrangement by whatever  name               called, and utilising the monies so  collected               or any               24               part  thereof  or  the  income  accruing  from               investment or other use of such monies for all               or any of the following               purposes--                    (a)  giving or awarding  periodically  or               otherwise to a specified number of subscribers               as  determined  by lot, draw or in  any  other               manner,  prizes or gifts in cash or  in  kind,               whether or not the recipients of the prize  or               gift is under a liability to make any  further               payment in respect of such scheme or  arrange-               ment;                     (b) refunding to the subscribers or such               of  them as have not won any prize  or  gift,,               the  whole or part of the subscriptions,  con-               tributions, or other monies collected, with or               without any bonus, premium, interest or  other               advantage,  howsoever called, on the  termina-

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             tion  of the scheme or arrangement, or, on  or               after  the  expiry of  the  period  stipulated               therein;               (2)  managing, conducting or supervising as  a               promoter, foreman or agent of any  transaction               or  arrangement  by which the  company  enters               into  an agreement with a specified number  of               subscribers  that  every  one  of  them  shall               subscribe a certain sum in instalments over  a               definite  period  and that every one  of  such               subscriber shall in his turn, as determined by               lot  or  by auction or by tender  or  in  such               other  manner  as may be provided for  in  the               agreement, be entitled to the prize amount;               Explanation:                         For  the purposes of this  sub-para-               graph,  the  expression "prize  amount"  shall               mean  the  amount,  by  whatever  name  it  be               called,  arrived at by deduction from  out  of               the total amount subscribed at each instalment               by all subscribers, (a) the commission charged               by the company as service charges as a promot-               er  or a foreman or an agent, and (b) any  sum               which a subscriber agrees to forego, from  out               of the total subscriptions of each instalment,               in consideration of the balance being paid  to               him.               (3) conducting any other form of chit or  kuri               which  is different from the type of  business               referred to in sub-paragraph (2) above;               25               (4) undertaking or carrying on or engaging  in               or executing any other business similar to the               business  referred to in sub-paragraphs(1)  to               (3)."     Paragraph (3)(1)(i) defined a ’Miscellaneous Non-Banking Company’  as meaning a company carrying on any of the  types of  business referred to in paragraph 2 of  the  directions. Paragraph  4 dealt with  acceptance  of  deposits  by   Mis- cellaneous  Non-Banking Companies. Paragraph 4(a) prescribed six  months as the minimum period for which a  Miscellaneous Non-Banking  Company could accept a deposit, but no  maximum period  was  prescribed.  Paragraph  4(b)(ii)  prescribed  a ceiling  of 25% of the aggregate of the paid up capital  and free reserve of the company in the case of deposits accepted by Miscellaneous Non-Banking Companies. Paragraph 13 enabled the Reserve Bank to exempt any company or class of companies from, all or any of the provisions of the directions  either generally or for a specified period, if it considered neces- sary  for  avoiding any hardship or for any other  just  and sufficient reason.     The  Reserve  Bank  of India issued  a  circular  letter bringing  the  directions to the notice  of  companies  like Peerless.  On September 14, 1973, the Peerless  Company  ad- dressed a letter to the Reserve Bank of India explaining the nature  of their business and claiming that  their  business was  outside the scope of the directions issued by  the  Re- serve Bank. Most important of all, it was requested that, if it  was thought that their business attracted the  notifica- tion, they should be granted exemption from the applicabili- ty  of the notification as provided by paragraph 13. It  was pointed out that their business was of a special type,  that it was carried on scientific lines and actuarial  principles and that the applicability of the notification would injuri- ously  affect  two  hundred thousands  of  subscribers  that

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20,000 persons would lose employment and that the  potential for  future  employment would be destroyed. It  was  further pointed  out that over 90% of the concerned Public Fund  was invested in Government securities and in Nationalised Banks. The Balance-sheet of the company, its brochure and a copy of its  advertisement were enclosed. The Reserve Bank of  India by  their order dated December 3, 1973 exempted the  company from the provisions of paragraph 4 of the notification in so far  as those provisions restricted the acceptance  of  sub- scriptions under the schemes upto 25% of the paid-up capital and  free  reserve fund. Certain  conditions  were  however, imposed. The company was directed to transfer every year  to the reserve fund a sum not less than 50% of the profit after taxes. The company was directed not to declare any 26 dividend  at  rates higher than 6% and 7%  on  ordinary  and preferential  shares till the free reserve became  equal  to the paid capital. The company was also required to  maintain not less than 75% of its total assets in the form of invest- ments  and Government Trustee-securities, etc.  The  Company was  directed to submit every year a certificate from  their Auditors  in  regard to compliance with the  conditions  im- posed. The exemption was to be reviewed every two years.  It appears that there was an inspection in 1974, but we have no information about the findings in the course of the  inspec- tion.  Evidently, nothing objectionable was found.  This  is apparent  from the affidavit filed on behalf of the  Reserve Bank  of India in the Calcutta High Court in Civil Rule  No. 5941(W)77,  a  writ petition filed by  Favourite  Investment Company challenging the refusal of the Reserve Bank to grant them exemption from the Miscellaneous Non-Banking  Companies Directions,  1973 and complaining of discrimination in  that such  an exemption had been granted to  Peerless.  Comparing the schemes of the two companies, it was pointed out in  the affidavit that the Endowment Certificates issued by Peerless Company  were for periods ranging from ten to  thirty  years while the Endowment Certificates granted by Favourite Compa- ny ranged from five to thirty years. It was stated that  the schemes  of  the Favourite Company which  ranged  for  short periods  from five to thirty years were unscientific  in  as much  as interest payable by the company on short term  cer- tificates  was  higher than 10% of the instalments  or  sub- scriptions  collected by the company which were invested  in Government securities and Banks where field was between five to  ten percent. It was noticed that Peerless  maintained  a fund  based on actuarial principles to which  the  subscrip- tions  received  from each subscriber from the  second  year onwards were credited along with compound interest at 8% per annum.  It was also noticed that cash and Bank  balances  in the  current  account of Peerless and  investment  in  other Government securities on short term and fixed deposits  were adequate to meet the contractual obligations of Peerless  to its  subscribers.  It  was noticed that  while  the  paid-up capital  and reserves of Peerless amounted at that  time  to Rs.2.33  lakhs and its investment in  Government  securities and  fixed deposits amounted to Rs.105.38 lakhs its  deposit liabilities amounted to Rs. 114.76 lakhs. This position  was considered satisfactory by the Reserve Bank. It was  finally stated "having regard to the satisfactory financial position of the Peerless and the fact that it was a well  established one  and having regard to the certificate furnished  by  the actuarial  consultant of the Peerless supported by data.  It was granted exemption from the provisions of paragraph 4  of the  1973  Directions  subject to its  compliance  with  the following  conditions." After setting out the conditions  it

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was stated that Peerless 27 had  been complying with the conditions and that its  finan- cial  position continued to be satisfactory. We should  men- tion  here that whatever vices there may be in the  Peerless Scheme  and the business methods of Peerless, the  financial position of Peerless, on the basis of the criteria mentioned in the affidavit of the Reserve Bank in the Favourire  Bank, is far sounder now than then.     In  1974,  a  Study Group headed by Dr. J  .S.  Raj  was appointed by the Reserve Bank to examine the existing statu- tory  provisions with a view to assessing their adequacy  in regulating the conduct of business by non-banking  companies in  the context of the monetary and credit policy laid  down by  the Reserve Bank of India from time to time and to  sug- gest measures for further tightening up the provisions so as to  ensure that the activities of such companies, in so  far as  they  pertained to the acceptance of  deposits,  invest- ments,  lending  operations,  etc.  subserved  the  national interest  and  served more effectively as  adjuncts  to  the regulations  of  the  monetary and credit  policies  of  the country,  besides  affording a degree of protection  to  the depositors’ monies. The Study Group went into the matter  in some  depth. Chapter VI of their report was devoted to  Mis- cellaneous Non-Banking Companies covered by the  Miscellane- ous Non-Banking Companies (Reserve Bank) Directions, 1973.     In paragraph 6.1 of the report, the Study Group  identi- fied  two types of Miscellaneous Non-Banking Companies  cov- ered  by  the Miscellaneous Non-Banking  Companies  (Reserve Bank) Directions as:               "(a)    those    conducting    prize    chits,               benefit/savings schemes, lucky draws, etc; the               modus  operandi of the types of  schemes  con-               ducted by these companies has been set out  in               a subsequent paragraph (Paragraph 6.3 extract-               ed below); and               (b) those conducting conventional or customary               chit  funds whereunder the  foreman  companies               enter into agreements with a specified  number               of  subscribers that every one of  them  shall               subscribe a certain sum in instalments over  a               definite  period  and that every one  of  such               subscriber shall in his turn, as determined by               lot  or  by auction or by tender  or  in  such               other  manner  as may be provided for  in  the               agreements, be entitled to the "prize amount".               This  prize amount is arrived at by  deduction               from  out  of the total amount  subscribed  at               each instalment by all subscribers, (i)               28               the  commission  charged  by  the  company  or               service charges as a promoter or a foreman  or               an  agent  and (ii) discount,  i.e.,  any  sum               which a subscriber agrees to forego, from  out               of the total subscriptions of each  instalment               in consideration of the balance being paid  to               him." The  business  of the  Miscellaneous  Non-Banking  Companies conducting  prize  chits, benefit/savings schemes  or  lucky draws  etc. was described in paragraph 6.3 of the report  as follows:-               "6.3  Companies conducting the above types  of               schemes  are comparatively of a recent  origin               and of late, there has been a mushroom  growth               of such companies which are doing brisk  busi-

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             ness  in several parts of the  country,  espe-               cially  in big cities like  Ahmedabad,  Banga-               lore,  Bombay, Calcutta and Delhi.  They  have               also  established branches in various  States.               These  companies float schemes for  collecting               money  from the public and the modus  operandi               of  such  schemes is  generally  as  described               below:                        The  company acts as the  foreman  or               promoter  and  collects subscriptions  in  one               lump sum or by monthly instalments spread over               a specified period from the subscribers to the               schemes. Periodically, the numbers allotted to               members  holding the tickets or units are  put               to  a  draw and the number holding  the  lucky               ticket gets the price either in cash or in the               form of an article of utility, such as a motor               car,  scooter,  etc. Once a  person  gets  the               prize,  he is very often not required  to  pay               further  instalments and his name  is  deleted               from  further draws. The schemes usually  pro-               vide  for the return of subscriptions paid  by               the members with or without an additional  sum               by  way of bonus or premium at the end of  the               stipulated period in case they do not get  any               prize. The principal items of income of  these               companies  are interest earned on loans  given               to the subscribers against the security of the               subscriptions paid or on an unsecured basis as               also  loans to other parties, service  charges               and  membership fees collected from  the  sub-               scribers  at  the  time of  admission  to  the               membership of the schemes. The major heads  of               expenditure  are  prizes given  in  accordance               with the rules and regulations of the schemes,               advertisements  and  publicity  expenses   and               remuneration  and  other  perquisites  to  the               directions." 29 The  Committee  observed in the report that  the  Directions known  as  the Misellaneous Non-Banking  Companies  (Reserve Bank of India) Directions. 1973 were applicable to companies conducting   what   were  commonly  known  as   prize   chit schemes/benefit  or savings schemes or lucky draws and  also to  those  conducting conventional type of  chits  or  those conducting any other form of chits/kuris. What is of  impor- tance  and what requires to be noted here is that the  Study Group  which had investigated the business of various  types of  Non-Banking  Companies was of the view, and  their  view must be taken to have been expressed with reference to those who  were  well acquainted with the nature  of  business  of Non-Banking  Companies  and those who were incharge  of  the enforcement of the 1973 Directions, that the 1973 Directions covered  companies conducting prize chit schemes/benefit  or saving schemes or lucky draws, as well as companies conduct- ing   conventional  type  of  chits  and  other   kinds   of chits/kuris. Simple recurring deposit schemes do not  appear to have been in the contemplation of either the Datta  Study Group or the Raj Committee, nor were such schemes considered at that stage as covered by the 1973 Directions.     The  conclusion of the Study Group was stated  in  para- graph 6, 11 as, follows:-               "From  the foregoing discussion, it  would  be               obvious  that prize chits or  benefit  schemes               benefit  primarily  the promoters and  do  not

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             serve  any  social purpose. On  the  contrary,               they  are prejudicial to the  public  interest               and  also  adversely affect  the  efficacy  of               fiscal  and  monetary policy. There  has  also               been  a  public clamour for  banning  of  such               schemes; this stems largely from the  malprac-               tices  indulged in by the promoters  and  also               the  possible exploitation of such schemes  by               unscrupulous elements to their own  advantage.               We  are, therefore, of the view that the  con-               duct  of  prize chits or  benefit  schemes  by               whatever name called should be totally  banned               in the larger interests of the public and that               suitable legislative measures should be  taken               for  the  purpose  if the  provisions  of  the               existing enactments are considered inadequate.               Companies  conducting  prize  chits,  benefits               schemes,  etc.,  may be allowed  a  period  of               three years which may be extended by one  more               year  to wind up their business in respect  of               such  schemes and/or switch over to any  other               type of business permissible under the law." 30     Finally,  in  paragraph 6.21 the study  Group  made  its recommendation  for  a  total ban on the  conduct  of  prize chits. If paragraph 6.21 is read along with paragraph 6.3 of the  Report we must take it that the recommendation  of  the Committee was that prize chits of the kind described by them in  paragraph 6.3 should be banned, respective of  the  name under  which they were conducted. Simple  Recurring  Deposit Schemes were not contemplated.     Thereafter, as a follow-up of the recommendations of the Raj Committee, in 1977 two sets of directions were issued by the  Reserve  Bank,  called  the  Miscellaneous  Non-Banking Companies (Reserve Bank) Directions, 1977 and the  Non-Bank- ing  Financial  Companies (Reserve Bank)  Directions,  1977. Paragraph  2 of Miscellaneous NonBanking Companies  (Reserve Bank)  Directions, 1977 was more or less the same  as  para- graph  2 of the 1973 directions. As in the 1973  directions, so  also in the 1977 directions a Miscellaneous  Non-Banking Company was defined to mean a company carrying on all or any of  the types of business referred to in paragraph 2 of  the directions. Paragraph 5 of the 1977 Miscellaneous  Non-Bank- ing  Companies (Reserve Bank) Directions which  corresponded to  paragraph  4  of the 1973 directions,  however,  made  a radical departure from the earlier provision. For the  first time,  a ceiling was fixed on the period for which  deposits could  be  accepted. It was provided that the  period  of  a deposit could not be more than six months. Paragraph 14 also vested  in the Reserve Bank the power to grant exemption  in suitable cases.     The  Non-Banking  Financial  Companies  (Reserve   Bank) Directions 1977, were issued simultaneously with the Miscel- laneous NonBanking Companies (Reserve Bank) Directions  1977 and Section 2(f), (g), (h), (i), (j), (k), (1), respectively defined  the  expressions  ’hirepurchase  finance  company’, ’housing finance company’, ’insurance company’,  ’investment company’, ’loan company’, ’mutual benefit financial company’ and  ’non-banking financial company’. ’NonBanking  Financial Company’  was defined to mean, "any  hirepurchase,  finance, housing  finance, investment, loan or mutual benefit  finan- cial  company  and an equipment leasing company but  not  to include  an  insurance company or stock exchange  or  stock- broking  company."  Paragraph  4 dealt  with  Acceptance  of Deposits  by mutual benefit financial  companies.  Paragraph

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5(1)  dealt  with period of deposits for  hire-purchase  fi- nance,  loan and investment companies and provided that  the period of deposits shall not be less than six months or more than  thirty  six months. Paragraph 19 made  the  directions applicable to a loan company also applicable to every compa- ny which was a 31 ’financial  institution’  but not belonging to  any  of  the categories  of companies mentioned in paragraph 2(1) (1)  or which was not a miscellaneous non-banking company within the meaning  of the Miscellaneous Non-Banking  Companies  Direc- tions,  1977. ’Financial Institution’ is defined in the  Act itself (Reserve Bank of India Act) by Sec. 45. 1 c.  Clauses (v) and (vi) which are relevant to the following effect:               "Financial Institution’ means any  non-banking               institution  which carries on as its  business               or  part of its business any of the  following               activities, namely:-                     (v) managing, conducting or supervising,               as foreman, agent or in any other capacity, of               chits or kuris as defined in any law which  is               for  the time being in force in any State,  or               any business, which is similar thereto;                     (vi)  collecting,  for  any  purpose  or               under  any scheme or arrangement  by  whatever               name  called, monies in lumpsum or  Otherwise,               by  way of subscriptions or by sale of  units,               or  other instruments or in any  other  manner               and 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 person." It was suggested by the learned Counsel for the Reserve Bank that whether Peerless Company was a miscellaneous  Non-Bank- ing Company within the meaning of the expression as  defined in  the  Miscellaneous Non-Banking Companies  (Reserve  Bank Directions, 1973) or a ’financial institution’ which was not such a miscellaneous banking company, undoubtedly, there was a ceiling or the maximum period for which the company  could accept  deposits  and that was thirty six  months.  We  will refer to the argument in due course.     Thereafter in 1978 the Prize Chits and Money Circulation Schemes (Banning) Act 1978 was enacted to ban the  promotion or conduct of prize chits and money circulation schemes  and for  matters  connected  therewith  or  incidental  thereto. Section 2(a) defines ’Con- 32 ventional  Chits’ on practically the same lines as the  type of business covered by the second part of paragraph 2 of the Miscellaneous NonBanking Companies (Reserve Bank) Directions 1973  and the Miscellaneous Non-Banking  Companies  (Reserve Bank) Directions, 1977. Section 2(c) defines ’Money Circula- tion Scheme’ and is as follows:               "2(c)  "money  circulation scheme"  means  any               scheme,  by  whatever  name  called,  for  the               making  of  quick or easy money,  or  for  the               receipt of any money or valuable thing as  the               consideration  for a promise to pay money,  on               any event or contingency relative or  applica-               ble  to  the  enrolment of  members  into  the               scheme, whether or not such money or thing  is               derived from the entrance money of the members               of such scheme or periodical subscriptions ;" Section 2(e) defines ’prize chit’ and is as follows:               "2(e) ’prize chit’ includes any transaction or

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             arrangement  by  whatever  name  called  under               which a person collects whether as a promoter,               foreman,  agent  or  in  any  other  capacity,               monies in one lumpsum or in instalments by way               of  contributions or subscriptions or by  sale               of units certificates or other instruments  or               in  any other manner or as membership fees  or               admission  fees  or service charges to  or  in               respect   of  any  savings,  mutual   benefit,               thrift, or any other scheme or arrangement  by               whatever name called, and utilises the  monies               so collected or any part thereof or the income               accruing from investment or other use of  such               monies  for all or any of the  following  pur-               poses, namely:-               (i) giving or awarding periodically or  other-               wise  to a specified number of subscribers  as               determined  by lot, draw or in any other  man-               ner,  prizes  or  gifts in cash  or  in  kind,               whether  or not the recipient of the prize  or               gift is under a liability to make any  further               payment in respect of such scheme or  arrange-               ment;               (ii)  refunding to the subscribers or such  of               them  as have not won any prize or  gift,  the               whole or part of the subscriptions,  contribu-               tions  or  other  monies  collected,  with  or               without any bonus, premium, interest or  other               advantage  by  whatever name  called,  on  the               termination  of the scheme or arrangement,  or               on or after the expiry of the period               33               stipulated  therein,  but does not  include  a               conventional chit;" The  primary  question in the present case  is  whether  the Endowment  Scheme  piloted by the Company falls  within  the definition  of  prize chit? Section 3 bans  prize  chit  and money circulation schemes and is in the following terms:               "No person shall promote or conduct any  prize               chit or money circulation scheme, or enrol  as               a  member to any such chit or scheme, or  par-               ticipate in it otherwise, or receive or  remit               any money in pursuance of such chit or scheme.               ’ ’ It is important to notice here that the ban is not merely on promoting or conducting any prize chit or money  circulation scheme  but also on participation in the scheme.  Section  4 makes a contravention of the provisions of Section 3 punish- able with imprisonment for a term which may extend to  three years or with fine which may extend to five thousand rupees, or  with both. Section 5 makes printing, publishing  of  any ticket,  coupon or other document for use in the prize  chit or money circulation scheme with a view to promotion of such scheme in contravention of the Act punishable with imprison- ment etc. So also the printing, publication or  distribution of any advertisement of the prize chit or money  circulation scheme. The use of any premises for purposes connected  with the  promotion or conduct of the scheme is also  punishable. Section 6 deals with offences by companies. Section 7  deals with  the  powers of entry, search and  seizure.  Section  8 provides for the forfeiture of newspapers or other  publica- tions containing any material connected with any prize  chit or  money  circulation scheme. Section 11 exempts  from  the operation  of  the  Act prize  chits  or  money  circulation schemes  promoted  by a State Government or any  officer  or

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authority  on its behalf, a company wholly owned by a  State Government  which does not carry on any business other  than the conducting of a prize chit or money circulation  scheme, a  banking  institution notified by the  Central  Government under  Section 51 of the Banking Regulation Act,  the  State Bank  of  India or a subsidiary bank of the  State  Bank  of India  or a corresponding new bank, Regional Rural  Bank,  a co-operative bank and any charitable or educational institu- tion  notified  in that behalf by the  State  Government  in consultation  with  the Reserve Bank of India. There  is  no general  provision which empowers the Central Government  or the Reserve Bank of India to exempt any other prize chit  or money circulation scheme from the 34 applicability  of the Act. Section 12 contains  transitional provisions relating to the winding up of the business relat- ing  to  a prize chit or money circulation scheme  which  is being  conducted at the commencement of the Act. The  person conducting  the  prize chit or money circulation  scheme  is required  to furnish to the State Government or  the  autho- rised officer and to the Reserve Bank in the prescribed form full  information regarding the chit or scheme along with  a winding  up plan prepared in accordance with the  provisions of rules made by the State Government. The State Government, in consultation with the Reserve Bank, is invested with  the power  to  permit  such person to continue  to  conduct  the business  relating  to the chit or scheme for  such  further period as may be necessary in the circumstances of the  case and  in  the  interests of the members of the  chit  or  the scheme.  The State Government in consultation with  the  Re- serve Bank may approve the winding up plan furnished by  the person  conducting the scheme with or without  modifications or reject the same. Section 13 empowers the State Government to make rules for the purpose of carrying out the provisions of the Act. The Government of West Bengal has made the Prize Chits and Money Circulation Schemes (Banning) (West  Bengal) Rules,  1979 in exercise of its powers under Section  13  of the Act.     The  Miscellaneous Non-Banking Companies (Reserve  Bank) Directions  1977  and the  Non-Banking  Financial  Companies (Reserve  Bank) Directions came into force on July 1,  1977. On  March  3, 1978 the Reserve Bank  informed  the  Peerless Company  that under the Miscellaneous Non-Banking  Companies Directions  which  applied to the Company, the  Company  was prohibited  from accepting deposits for more than 36  months and  since  the deposits accepted by the  Company  were  for periods exceeding 36 months, the Reserve Bank wanted to know what action the Company proposed to take to comply with  the requirement stipulating the maximum period for which  depos- its might be accepted. In reply, the Company, by its  letter dated  31st March, 1978 pointed out the special features  of the Company which persuade the Reserve Bank to grant  exemp- tion  to the Company from the 1973 directions.  The  Company invited  the  attention of the Reserve Bank to  the  various elements of the scheme which made it impracticable to comply with  the  stipulation regarding the maximum  period  of  36 months  as that would make the scheme wholly  unviable.  The Company  requested that further exemption may be granted  in the public interest. The alternative, it was said, would  be to close the business and that would mean loss of employment to  several  thousands of employees and  financial  loss  to millions  of  depositors.  The Company  suggested  that  the Reserve Bank might recommend to the Central 35 Government  to convert the undertaking into  a  joint-sector

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enterprise.  The letter ended with an appeal to the  Reserve Bank  to grant exemption from the restrictions  relating  to maximum  period. It is not clear what precisely  took  place subsequently  but  there was an inspection of  the  Peerless Company’s  books  by  an inspection team  appointed  by  the Reserve  Bank of India. The team in its report  pointed  out various  unhealthy  features of the schemes managed  by  the Peerless  Company. The principal unhealthy features  pointed were:                     "(a) the emphasis of the Company was  on               attracting fresh business rather than collect-               ing renewal subscriptions;                     (b)  the agency structure and the  rates               of  commission were conceived in the  interest               of the agents and not the depositors;                     (c)  the  ’owned funds’ of  the  Company               were low and did not keep pace with the  rapid               expansion of its outside liabilities;                     (d)  the  Company followed  the  curious               procedure  of crediting the entire  amount  of               first  year’s subscriptions to its profit  and               loss  account  treating  it  as  income.  This               peculiar accounting procedure resulted in  the               profit  and  loss  account  published  by  the               Company not representing a true picture of the               real profits of the Company;                     (e) certificates were treated as  lapsed               if any subscription was hot paid in the  first               three years;                     (f)  the savings scheme of  the  Company               was  basically  in  the  nature  of  recurring               deposits  schemes  of  Commercial  Banks   and               National  Savings Organisations but the  yield               was very much lower;               (g)  all  sorts of efforts were  made  by  the               Company to capture public imagination." Thereafter  on July 23, 1979 the Reserve Bank of India  pur- ported  to send a reply to the Company’s letter dated  March 31,  1978 to which we have made a reference above.  By  this letter the Reserve Bank pointed out to the Company that  the schemes conducted by the Company were 36 covered  by  the  provisions of the Prize  Chits  and  Money Circulation Schemes (Banning) Act, 1978 which had come  into force with effect from December 12, 1978. As the Company was banned from doing fresh business and was required to wind up its  existing business under the Act, there was no  question of  granting any exemption to the company. Nevertheless  the Reserve  Bank stated that they had considered the claim  for exemption  on  merits  and found that it  was  necessary  to cancel  the exemption already granted. The reasons  for  the proposed cancellation were set out and the Company was asked to show cause why the exemption should not be cancelled.  On August 30, 1979 the Company replied at great length  stating how necessary it was in the public interest to grant  exemp- tion to the Company. Exemption was, however, refused by  the Reserve  Bank  on  March 19, 1980. On August  10,  1979  the Government  of West Bengal addressed a communication to  the Peerless  Company  pointed out that  the  Prize  Chits/Money Circulation Schemes conducted by the Company came within the purview  of  the Prize Chits and Money  Circulation  Schemes Banning) Act, 1978 and, therefore, the Company was under  an obligation  to submit a winding up plan under Rule 4 of  the Prize  Chits and Money Circulation Schemes  (Banning)  (West Bengal) Rules, 1979.

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   In the meanwhile on September 3, 1979, the Company filed a writ petition in the Calcutta High Court for a declaration that the Prize Chits and Money Circulation Schemes (Banning) Act,  1978 did not apply to the business carried on  by  the company. A Rule was issued and an Interim Order was made  in favour  of  the  company, first for a  limited  period  and, later,  till  the disposal of the writ petition.  A  similar writ  petition was filed questioning a notice issued by  the Madhya  Pradesh Government on the same lines as that  issued by the West Bengal Government. A Rule and Interim Order were issued.  A learned single Judge of the High Court  dismissed both the writ petitions but appeals preferred by the company under the Letters Patent against the judgment of the learned single Judge were allowed by a Division Bench of the Calcut- ta High Court. It was declared that the business carried  on by the company did not come within the mischief of the Prize Chits  and  Money Circulation Schemes (Banning)  Act,  1978. Against  the judgment of the Division Bench of the  Calcutta High Court the Reserve Bank of India, the Union of India and the  State of West Bengal have preferred Civil  Appeal  Nos. 3562,  3563, 3564, 3565 and 4459 of 1986. In the  course  of the judgment, the Division Bench of the Calcutta High  Court had  observed that the company was a  financial  institution within the meaning of paragraph 11 of the Non-Banking Finan- cial  Companies (Reserve Bank) directions, 1977  and  there- fore, 37 the  Directions  contained therein applied to  the  business carried  on by the company. Against this observation of  the Division Bench, the Company has also preferred Civil  Appeal Nos.  3566 and 3557 of 1986. We may also mention  here  that after  the  judgment of the Division Bench of  the  Calcutta High Court, the Company, pursuant to the observation of  the Division  Bench that it was a financial  institution  within the  meaning  of paragraph 11 of the  Non-Banking  Financial Companies Directions, applied afresh to the Reserve Bank  of India for exemption from complying with the Directions.  The Reserve  Bank  of India by its order dated August  22,  1986 refused  to grant the exemption sought. It appears that  the Company has filed another writ petition in the Calcutta High Court  against the refusal of the Reserve Bank of  India  to grant  exemption. In view of the pendency of the writ  peti- tion  in  the Calcutta High Court we do not  desire  to  say anything  on  the  merits of the claim of  the  Company  for exemption or on the question whether the Company is a finan- cial  institution within the meaning of paragraph 11 of  the Non-Banking  Financial Companies (Reserve Bank)  Directions. We leave that question open as we consider that the  appeals preferred  by the Reserve Bank of India, the Union of  India and the State of West Bengal may be decided without express- ing  any opinion on the question. Appeals preferred  by  the Company are disposed of with these observations.     The question for our consideration is, "Is the Endowment Scheme  of  the  Peerless Company a prize  chit  within  the meaning of Section 2(e) of the Prize Chits and Money  Circu- lation Schemes (Banning) Act?" The particulars of the scheme are not in dispute. What is its nature? It is not a gambling scheme. It is not a lottery scheme. There are no prizes,  no gifts,  no elements of chance. It is just a plain  Recurring Deposit  Scheme such as the many schemes floated by  Commer- cial Banks and National Savings Organisation. This is admit- ted  in the Inspection Report of the Reserve Bank of  India. But,  says  the Counsel for the Reserve Bank,  if  money  is received  in a lumpsum or in instalments and money  is  uti- lised  either  for payment of prizes or for  refund  of  the

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whole or part of the amount of subscription, the scheme is a prize  chit  as defined. Prize or gift is not  an  essential element  and refund of the amount of subscription is  suffi- cient  to  bring it within the mischief of s.2(e).  He  says clauses  (i) and (ii) of the definition are disjunctive.  He emphasises  the words "for all or any of the following  pur- poses". And, he stresses the fact that the definition is  an ’inclusive’  one.  He  says that if  Commercial  Banks,  the National  Savings Organisation and others are  permitted  to receive deposits And to run Recurring Deposit Schemes,  they do so under special statutes. 38 The learned Attorney General and the learned Counsel for the Reserve Bank of India urge that the Act is aimed at protect- ing  the  interests  of depositors generally  and  that  the millions  of  depositors of Peerless  need  such  protection sorely.  On the other hand the learned Counsel for  Peerless would  say that the history of the legislation and the  mis- chief  which the legislation seeks to prevent plainly  indi- cate that the legislation is aimed at schemes involving  the giving  away  of prizes or gifts and  that  the  ’inclusive’ definition  is  merely intended to take in  all  schemes  or arrangements,  whether  called prize chits  or  by  whatever other  name.  It is said that Parliament  could  never  have intended to strike at all Recurring Deposit Schemes, partic- ularly  when  the Life Insurance Corporation of  India,  the Commercial  Banks  and National Savings  Organisation  offer such  schemes.  The Learned Counsel  urges  that  Parliament could  never have contemplated the closure of  a  pioneering business such as Peerless which has tapped hitherto untapped savings  resources of the country. If there are any  vicious features  of  the business, Peerless, he says, is  ready  to remove the vices and cure the defects. He says, for example, the  forfeiture clause has now been deleted from the  scheme and this is more than what the Life Insurance Corporation, a monolithic, monopolistic Public Sector Corporation has done. He  even hints that the company may be nationalised and  the Company would raise no protest. According to him the closure of  the business of the company will result in throwing  out of employment tons of thousands of employees and putting  in jeopardy the small savings of millions of little Depositors. We must add here that both sides talked of the public inter- est and shed copious tears for the ’unfortunate  depositors’ but  neither side appeared to have any ready plan or even  a contingent plan to protect or benefit the depositors. On the one  hand,  there is a demand for the retributive  pound  of flesh, unmindful of the future of thousands of employees and the fate of the small savings of millions of depositors, all in the name of the interest of the depositors. On the other, having  bled  the depositors white there is now a  glib  and make-believe  offer  of submission to strict  regulation  or even  nationalisation for the protection, it seems,  of  em- ployees and depositors.     In  the  ultimate  analysis the question  turns  on  the interpretation  of the definition of ’Prize Chit’ in  s.2(e) of  the Prize Chits and Money Circulation Schemes  (Banning) Act, 1978. On this, we are not without guidance. We have  it in Srinivasa Enterprise v. Union of India, [1981] 1 SCR 801. The  very provision was considered and construed there by  a bench of three Judges of the Court which included one of us. The 39 Court, fortunately, speaking through Krishna Iyer, J.  after extracting s.2(e), observed,               "The  quint-essential aspects of a prize  chit

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             are  that  the organizer  collects  moneys  in               lumpsum  or instalments, pursuant to a  scheme               or arrangement, and he utilises such moneys as               he fancies primarily for his private  appetite               and for (1) awarding periodically or otherwise               to  a specified number of subscribers,  prizes               in  cash  or  kind and (2)  refunding  to  the               subscribers  the  whole or part of  the  money               collected on the termination of the scheme  or               otherwise.  The apparent tenor may  not  fully               bring  out  the  exploitative  import  lurking               beneath  the  surface of the words  which  de-               scribe  the scheme. Small sums  are  collected               from  vast numbers of persons,  ordinarily  of               slender means, in urban and rural areas.  They               are  reduced to believe by the blare of  glit-               tering publicity and the dangling of astronom-               ical amounts they stand a chance--in practice,               neligible--of getting a huge fortune by making               petty periodical payments. The indigent agres-               tics and the proletarian urbanites,  pressured               by dire poverty had opted by the hazy hope  of               a lucky draw, subscribe to the scheme although               they  can iii-afford to spare any money.  This               is not promotion of thrift or wholesome  small               savings because the poor who pay, are bound to               continue  to pay for a whole period of  a  few               years over peril of losing what has been  paid               and,  the end of it, the fragile prospects  of               their getting prizes are next to nil and  even               the hard-earned money which they have invested               hardly carries any interest. They are eligible               to get back the money they have paid in  drib-               lets, virtually without interest, the  expres-               sion ’bonus’ in s.2(a) being an euphemism  for               a  nominal  sum. What is more,  the  repayable               amount  being small and the subscribers  being               scattered  all over the country, they find  it               difficult even to recover the money by  expensive, d ilatory  litigative process.           "Since there are a large number of prize chits all over  the  country  which have almost  become  a  Pan-Indian opidemic and since the total number of people victimised  by these projects are considerable the injury to the  community is  substantial,  so that a welfare state dedicated  to  the Directive Principles of Part IV has to awake and protect the vulnerable sector. Another weighty factor which 40 has alerted the state into action is that the flood of funds flowing  through prize chits benefit the organisers of  such schemes  who  have  no social  responsibility  for  national productivity  and in their hands is easy money  with  little developmental  benefits or attractive returns for  the  poor investors.          "The  noxious net cast by the prize chit  promoters was  large and the State moved to stop this menace.  Many  a little makes a mickle, and those small sums collected from a substantial  number  of subscribers  accumulated  into  huge resources which otherwise would ordinarily have been  avail- able  for  national  development. The grim  picture  of  the luckless  may  who  were losing their  money,  appetized  by gambling  prospects,  and the sterlisation of  people’s  re- sources  which  were siphoned off  by  private  adventurists through prize chits to the detriment of national development

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ignited the impugned legislation." The Court identified the vice sought to be prevented by  the Banning Act as the glitter of glamorous prizes, the lure  of big  money  for  small. What it sought to  prevent  was  the exploitation of the ignorant poor by the glare of  publicity of  fabulous prizes. The Court found that it was  this  mis- chief  that was remedied by the Act. According to  Srinivasa the  giving away or awarding prizes or gifts to a  specified number  of  subscribers is an essential element of  a  Prize Chit, as also refunding to the subscribers the whole or part of  the amount of subscription. The Court then  referred  to the report of the Raj Study Group to emphasise, in the words of  Krishna  Iyer, J. ’the trauma inflicted  by  lucky  draw schemes  on the host of luckless illiterates  succumbing  to the  prize mana’. Dealing with alternate proposals  to  save prize chits the Court said, "In  many situations, the poor and unwary have to  be  saved from the seducing processes resorted by unscrupulous  racke- teers who glamourize and prey upon the gambling instinct  to get  rich  quick  through prizes. So long as  there  is  the resistless  spell  of a chance though small, of  securing  a prize,  though on paper, people chase the prospect  by  sub- scribing  to the speculative scheme only to lose  what  they had. Can you save moths from the fire except by putting  out the fatal glow?" 41 Distinguishing the Prize Chit from the Conventional Chit, it was said, "Once the prize facet of the chit scheme is  given up,  it becomes substantially a ’conventional chit’ and  the ban  of  the law ceases to operate." Quoting  from  the  Raj Committee they said, "Conventional Chits and Prize Chits are different  categories with different financial features  and different damaging effects." Again the Court, while pointing out  that in its pith and substance the legislation was  not aimed  at banning lotteries which the State legislature  had jurisdiction  to  do  but was aimed at  banning  a  ’special specie of contracts with sinister feature’ while the Parlia- ment was competent to do, further observed.        "So  viewed, it is easy to accept the  submission  of the  Union of India that Parliament wanted to  restrict  and prohibit certain types of contracts because of the  noxtious element of gambling and lottery implicit therein and apt  to entice the credulous and uncautious."     So,  the Court was of the view that the Prize Chits  and Money  Circulation  Schemes (Banning) Act  was  designed  to fight  the baser human instinct of gambling aroused  by  the prize element involved in the banned transactions- The Court concluded  that  it was the prize element  that  brought  it within  the mischief of the Act and that without  the  prize element  it would be no different from a Conventional  Chit, considered  harmless by the Parliament. We must notice  here that in a ’Conventional Chit’ as defined in the Act,  though every  subscriber is entitled to the prize amount, some  get it  sooner  than the others depending on the result  of  the auction  or the draw and to the extent and it depends  on  a draw  there is a slight element of chance. In the  Recurring Deposit Schemes such as the ones we are concerned with, even that  element of chance is lacking. If ’Conventional  Chits’ are  not banned, it is a legitimate question to ask  whether Parliament  could have contemplated the banning  of  schemes not involving the element of the kind of harm intended to be prevented,  even  to the slight degree  as  in  Conventional Chits?      Much  argument was advanced on the significance of  the word  ’includes’ and what an inclusive  definition  implies.

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Both  sides relied on Dilworth’s case. Both sides  read  out the well known passage in that case where it was stated, "The  word "include" is very generally used in  interpreta-, tion  clauses  in order to enlarge the meaning of  words  or phrases occurring in the body of the statute; and when it is so used these words or phrases must be construed as com- 42 prehending,  not only such things as they signify  according to  their  natural import, but also those things  which  the interpretation clause declares that they shall include.  But the  word "include" is susceptible of another  construction, which  may become imperative, if the context of the  Act  is sufficient  to show that it was not merely employed for  the purpose  of adding to the natural significance of the  words or  expressions defined. It may be equivalent to  "mean  and include",  and  in  that case it may  afford  an  exhaustive explanation  of the meaning which, for the purposes  of  the Act,  must invariably be attached to these words or  expres- sions." Our  attention was also invited to Ardeshir Bhiwandiwala  v. State of Bombay, [1961] 3 SCR 592; C.I.T. Andhra Pradesh  v. Taj  Mahal  Hotel, [1972] 1 SCR 168 and S. K.  Guptav.  K.P. Jain, [1979] 4 SCC 54.     We do not think it necessary to launch into a discussion of  either Dilworth’s case or any of the other cases  cited. All  that is necessary for us to say is  this:  Legislatures resort to inclusive definitions 1) to enlarge the meaning of words or phrases so as to take in the ordinary, popular  and natural  sense  of the words and also the  sense  which  the statute  wishes to attribute to it, 2) to  include  meanings about  which there might be some dispute, or, (3)  to  bring under  one nomenclature all transactions possessing  certain similar features but going under different names.  Depending on the context, in the process of enlarging, the  definition may  even become exhaustive. We do not think that  by  using the word ’includes’ in the definition in s.2(a) of the  Act, the  Parliament intended to so expand the meaning  of  prize chit  as to take in every scheme involving  subscribing  and refunding of money. The word ’includes’, the context  shows, was  intended not to expand the meaning of ’prize chit’  but to  cover all transactions or arrangements of the nature  of prize chits but under different names. The expression ’Prize Chit’  had  nowhere  been statutorily  defined  before.  The Bhahatosh  Datta  Study Group and the Raj  Study  Group  had identified  the schemes popularly called ’Prize Chits’.  The Study  Groups also recognised that ’Prize Chits’  were  also variously called benefit/savings schemes and lucky draws and that  the  basic  common features of the  schemes  were  the giving  of a prize and the ultimate refund of the amount  of subscriptions (Vide Para 6.3 of the report of the Raj  Study Group).  It was recommended that prize chit and the like  by whatever  name  called should be banned. Since  prize  chits were  called  differently, ’prize  chits’,  ’benefit/savings schemes’, ’lucky draws’, etc. it 43 became  necessary for the Parliament to resort to an  inclu- sive  definitions  so  as to bring in  all  transactions  or arrangements containing these two elements. We do not  think that in defining the expression ’Prize Chit’, the Parliament intended to depart from the meaning which the expression had come  to acquire in the world of finance, the meaning  which the  Datta and the Raj Study Groups had given it. That  this is the only permissible interpretation will also be  further evident  from  the  text Chit and the context  as  we  shall presently see.

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   Interpretation must depend on the text and the  context. They  are the bases of interpretation. One may well  say  if the  text is the texture, context is what gives the  colour. Neither can be ignored. Both are important. That interpreta- tion  is best which makes the textual  interpretation  match the  contextual. A statute is best interpreted when we  know why it was enacted. With this knowledge, the statute must be read,  first as a whole and then section by section,  clause by  clause, phrase by phrase and word by word. If a  statute is  looked  at, in the context of its  enactment,  with  the glasses  of the statutemaker, provided by such context,  its scheme,  the sections, clauses, phrases and words  may  take colour and appear different than when the statute is  looked at  without the glasses provided by the context. With  these glasses we must look at the Act as a whole and discover what each  section,  each clause, each phrase and  each  word  is meant  and designed to say as to fit into the scheme of  the entire  Act. No part of a statute and no word of  a  statute can be construed in isolation. Statutes have to be construed so  that  every word has a place and everything  is  in  its place. It is by looking at the definition as a whole in  the setting of the entire Act and by reference to what  preceded the  enactment  and the reasons for it that the  Court  con- strued the expression ’Prize Chit’ in Srinivasa and we  find no reason to depart from the Court’s construction.     We have already referred to the Bhabatosh and Raj  Study Groups’  Reports  and recommendations. In para  6.3  of  the latter  report  the two common and basic features  of  prize chits  by whatever name known were identified as the  giving of  prizes to the lucky ones and the refunding of  subscrip- tion to every one. These prize chits by whatever name  known were  recommended to be banned. It was  this  recommendation that  was accepted by the Parliament in enacting  the  Prize Chits  and Money Circulation Schemes (Banning) Act. If  this much  is borne in mind it becomes evident that the  two  re- quirements mentioned in the two clauses (i) and (ii) of  the definition  are not to be read disjunctively; they  are  two distinct attributes of ’Prize Chits’, each of which 44 has to be satisfied. It is important to notice here that the Conventional  Chit  satisfies both the requirements  of  the definition of ’Prize Chit’, since, as we have already point- ed  out,  it involves both the ’certain’  and  the  ’chance’ elements, the certain element being the refund of the amount of subscriptions less the deductions and the chance  element being  the time of such payment, dependent on the result  of the  draw  or auction. Yet the definition  of  ’Prize  Chit’ expressly  excludes the Conventional Chit obviously for  the reason  that  the ’chance’ element is  overshadowed  by  the ’certain’  element.  If so, why should any  construction  be placed  on  the definition so as to bring in  all  Recurring Deposit  Schemes, even if they do not involve a chance  ele- ment?  Such a construction would reduce the definition to  a near  absurdity  and render the reference to the  giving  or awarding of a prize or gift, a meaningless superfluity. If a conventional chit is not a ’prize chit’ by definition, there appears  to  be  no logic in construing  the  definition  to include a Recurring Deposit Scheme. The argument is that the two  clauses (i) and (ii) are to be read  disjunctively  and that  they should not be read as if they are joined  by  the conjunction  ’and’.  We do not agree. There is  no  need  to introduce the word ’or’ either. How clauses (i) and (ii)  of s.2(e)  have to be read depends on the context. The  context requires  the definition to be read as if both clauses  have to be satisfied. There is nothing in the text which makes it

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imperative  that it be read otherwise. The  learned  counsel urges  that  the  expression "all or any  of  the  following purposes"  indicates that the purpose may be either the  one mentioned  in  (i) or the one mentioned in (ii). We  do  not agree with this submission. Each of the clauses (i) and (ii) contains a number of alternatives and it is to those several alternatives that the expression "all or any of the  follow- ing  purposes" refers and not to (i) or (ii) which  are  not alternatives at all. In fact, a prize chit, by whatever name it may be called, does not contemplate the exhaustion of the entire fund by the giving of prizes; it invariably  provides for a refund of the amount of subscription, less the  deduc- tions,  to all the subscribers or to those who have not  won prizes,  depending on the nature of the scheme. Clauses  (i) and  (ii)  refer to the twin attributes of a prize  chit  or like scheme and not to two alternate attributes.     Our  construction of s.2(e) is further reinforced  by  a reference  to  the other provisions of the  Act.  Section  3 prescribes,  "No person shall promote or conduct  any  prize chit  or money circulation scheme, or enrol as a  member  to any  such chit or scheme, or participate in it otherwise  or receive  or  remit any money in pursuance of  such  chit  or scheme."  Section 4 makes a contravention of s.3  punishable with imprisonment extending to three years or fine extending to five thousand 45 rupees subject to a minimum sentence of one year’s imprison- ment and fine of one thousand rupees. It is clear that  even a  subscriber  is guilty of an offence  punishable  with  an obligatory  minimum  sentence. While it is possible  to  say that Parliament desired to root out prize chits and  schemes of like nature involving the vicious element of gambling, it is  inconceivable  that Parliament intended  to  visit  even subscribers  to Recurring Deposit Schemes involving no  such vice  with such dire consequence. Section 5 makes  printing, publishing  of any ticket, coupon or other document for  use in the Prize Chit or Money Circulation Scheme with a view to promotion  of such scheme in contravention of the  Act,  the printing,  publication or distribution of any  advertisement of  the Prize Chit or Money Circulation Scheme, the  use  of any  premises for purposes connected with the  promotion  or conduct  of  the scheme etc.  punishable  with  imprisonment extending  to two years or fine extending to three  thousand rupees subject to a minimum sentence of one year’s imprison- ment and fine of one thousand rupees. Section 8 provides for forfeiture  of  newspapers or other  publications  connected with  any  Prize Chit or Money Circulation  Schemes.  Surely these  provisions  are far too draconian to  be  applied  to schemes which are but Recurring Deposit Schemes.     However we look at it, we arrive at the conclusion  that s.2(e)  does not contemplate a scheme without a  prize  and, therefore, the Endowment Certificate Scheme of the  Peerless Company  is  outside the Prize Chits and  Money  Circulation Schemes  (Banning) Act. The conclusion appears to us  to  be irresistable.  The  appeals  filed by the  Reserve  Bank  of India,  the Union of India and the State of West Bangal  are accordingly dismissed. 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 thousands of employees. We must also record our dissatisfac- tion with some of the schemes of the Life Insurance Corpora- tion 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  sav-

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ings 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?     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 46 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 specu- lative  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 spending  the vacation, carried as many as ten advertisements with ’banner head lines’, 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 adverisers offered to double the deposit in 30 months,  2000 for  1000,  10000 for 5000, they  said.  Another  advertiser offered  interest  ranging between 30% to  38%  for  periods ranging  between  six months to five years. Almost  all  the advertisers offered extra interest ranging between 3% to  6% 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 companies  which  are  accepting  deposits,  promising  most unlikely returns 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 businesses 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 whatsoever. Action appears imperative. S.R.                                                 Appeals dismissed. 47