Reserve Bank of India Act, I934: Sections 45K (3), 45J, 45I & 45L: Residuary Non-Banking Companies-Receiving deposits under the saving schemes-Directions issued by Reserve Bank- Such companies to deposit with public sector Banks or invest in unencumbered securities the aggregate amounts of liabilities to depositors-To disclose the same as liabilities in order to secure return of the money to depositors-Such directions whether statutory in nature-Whether ultra vires of Section 45K (3)-Whether violative of Articles 14 and 19 (I) (g) of the Constitution of India.

Constitution of India, I950:

Articles 14, I9 (I) (g), I9 (6): Directions issued by Reserve Bank of India to Residuary Non-Banking Companies under Sections 45 J and 45 K of the Reserve Bank of India Act, 1934 safeguarding the interest of the depositor-Vires of- Whether directions in the nature of reasonable restrictions. Articles I 3 (I) and (2): Constitutionality of a statute--Real effect of the statute to be seen by lifting the veil of form and appearance of legislation-Degree of encroachment on fundamental rights- Consideration of-Tests of fairness and reasonableness-Applicability of-Constitutionality of the statute-Presumption of-Balance between public interest and individual interest-Maintaining of Practice & Procedure: Function of Courts-Matters relating to financial and economic policies--Bodies like Reserve Bank of India fully competent-Court not to advise on such matters. While pronouncing its Judgment in Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd., [1987] 1 SCC 424, this Court observed that it would be open to the Reserve Bank of India (RBI) to take such steps as were open to it in law to regulate the savings schemes run by Residuary Non-Banking Companies (RNBCs) to prevent exploitation of ignorant investors while at the same time taking care to protect the thousands of employees working in such companies. This Court also expressed grave concern at the mushroom growth of financial ·investment companies offering staggering rates of interests to· depositors leading to suspicion whether these companies were speculative ventures floated to attract unwary and credulous investors and capture their hard-earned savings.

Pursuant to the said observations of this Court and keeping in mind the public interest, the RBI in exercise of its powers under sections 45J and 45K of the Reserve Bank of India Act, 1934, and of all powers enabling it in that behalf, issued certain directions by way of Notification No. DFC-55/DG (0)'87 dated 15.5.1987.

A Writ Petition was filed before the High Court challenging the constitutional validity of the said directions issued by the RBI. A Single Judge of the High Court passed certain interim orders. Being aggrieved against the interim orders, the RBI preferred an appeal before the Division Bench. The Division Bench disposed of the appeal as well as the Writ Petition. It held that the RBI was empowered to issue directions to the Residuary Non-Banking Companies in the interest of depositors; but to the extent such directions were found to be prohibitory or unworkable and as such unreasonable, would be beyond the powers of RBI. Peerless which became a party-respondent, filed an application for clarification of the judgment, as regards payment against discontinued certificates. The High Court clarified that in such cases the depositors be allowed to take loan against payments made till discontinuance on such terms and conditions as the company may stipulate.

The present appeals were filed by RBI against the orders of the High Court. A Writ Petition has been filed directly before this Court, challenging the directions as being ultra vires of sections 45J and 45K of the.Reserve Bank of India Act, 1934 as also violative of the provisions of the constitution. On behalf of the Writ Petitioners it was contended that since the 1987 directions issued by RBI were in the nature of subordinate legislation, it was clear that RBI overstepped the bounds of the parent statute; that the source of power for issuing the directions as being derived from section 45L was only an after-thought; that from the working results it appeared impossible to carry on the traditional business for any longer period without incurring huge losses; that from in the business carried on by Peerless and other similar RNBCs that the working capital is generated out of the subscripB tions received from the certificate holders either in lump sum or in instalments and such deposits are paid back with the guaranteed accretions, bonus, interest etc. in terms of the contract at the and of the stipulated term; that the interest of the depositors has not been impaired in any manner. whatsoever by the method of accountancy followed by Peerless and all similar companies, namely, appropriation of a part of the subscription to the profit and loss account and meeting the working capital requirements out of the same. On behalf of the appellant-RBI, it was contended that it had the power to issue the said directions; that the said directions were issued in pursuance to this Court's observations, and in public interest; that the said directions had not imposed any restriction on the right to carry on business but only placed a restriction with respect to one of the modes of raising reserves i.e. through public deposits; that the directions cannot be condemned as being violative of Article 19(1) (g); and that the formula laid down by the High Court was self-defeating and deprived altogether the benefits of E security provisions given to depositors under the 1987 directions. F On behalf of the Peerless Field Officers Association, it was contended that if the directions of 1987 were to be upheld, the undertakings of Peerless would face inevitable closure and almost 14 lac field officers would lose their only source of livelihood.